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Will my business run out of cash while it grows, and in which month?
Project business cash flows across operating, investing, and financing activities and see the cash conversion cycle.
Enter business financial data to project cash flow
Each month includes the cash tied up by growth. Income tax is not included.
The lab opens on $100,000 of monthly revenue, a 65% gross margin, and $65,000 of operating expenses, so operating income is $0. Customers pay in 45 days, inventory sits for 60, and suppliers are paid in 30, a 75-day cash conversion cycle. Growth of 5% adds $5,000 of revenue a month, and tying that up costs $12,500, so operating cash flow is negative $12,500, a margin of negative 12.5%. Add $17,000 of equipment, software, and facilities spending for investing cash flow of negative $17,000, and $9,500 of loan payments and interest for financing cash flow of negative $9,500. Net cash flow is negative $39,000 and free cash flow is negative $29,500. Starting from $50,000 in the bank, the projection goes below zero in month 2, bottoms near negative $164,000 in month 11, and ends month 12 at negative $160,600, even though operating cash flow turns positive in month 5.
Finance Quest is educational. It is not financial advice, and no calculator here knows your full situation.
In the lab's defaults, operating income is exactly $0, which can read as breaking even. Operating cash flow is negative $12,500 because growth buys inventory and extends credit before customers pay. A business can grow, report a profit, and still run out of cash. The cash conversion cycle is the number that shows how long each new dollar of sales stays tied up.
Operating cash flow comes from running the business day to day. Investing cash flow is spending on long-lived assets such as equipment. Financing cash flow is money moving to and from lenders and owners, such as loan payments and dividends. A cash flow statement reports all three.
It is days sales outstanding plus days inventory outstanding minus days payable outstanding. In the lab's defaults that is 45 plus 60 minus 30, or 75 days. A shorter cycle means cash returns sooner. A zero or negative cycle means customers pay before suppliers do.
Operating cash flow plus investing cash flow. It is the cash left after paying for operations and the equipment, software, and facilities spending, before loan payments and dividends. Definitions of free cash flow vary, and this is the lab's.
Growth uses cash before it returns cash. The business buys inventory and waits for customers to pay, and the monthly loan payments and equipment spending continue meanwhile. In the lab's defaults, operating cash flow turns positive in month 5, but the balance keeps falling until month 11.
The lesson for this lab is in Chapter 16, Business & Entrepreneurship Finance. Read the lesson