What is cashflow positive?
At every founder pitch event to raise capital (in Australia at least), there is normally a reference to reaching “cashflow positive” as a key milestone at some point in the future.
What does this mean? There are several definitions, here we’ve worked through the one below:
Monthly Cash In – Monthly Cash Out > Zero
Why does this metric have so much importance? Once you reach “cashflow positive”, you no longer need to capital raise just to pay the payroll, it changes your options substantially in terms of how you grow your business.
HOW DO YOU CALCULATE IT?
Monthly Cash In relates to the level of recurring revenue, generated by your product (excluding GST) that will, based on current activities, continue to flow in each month. If you have a “clip the ticket” model, then the value you use here is the net commission you will receive, not the full value paid by the end customer.
An example would be a performance based product, based on # new customers for a business owner, with a setup fee of $100.
Your marketing activities may be generating 100 new signups a month. You then may have 1,000 active customers spending on average $50 / month, on your platform.
Hence Monthly Cash In = 100 new accounts * $100 + 1,000 accounts * $50 = $60,000
Monthly Cash Out relates to costs of your team, your contractors, your office and network costs:
– Ongoing costs to build your product, including new features and bug fixes.
– Acquire 100 new customers / month
– Retain & support 1,000 active customers / month
– Network costs to support your platform
– Office costs and other admin costs to run a business
This bill will depend on your business model however will be higher than $60,000.
“Cashflow positive” is the point where your monthly cash in exceeds your monthly cash out. The cost of acquiring new customers is very high for many technology companies and is often underestimated.
While the cost of product development and customer acquisition is coming down, there are very few success stories who have managed to genuinely reach “cashflow positive” for less than $700 – $800K monthly cash in, or annual net revenue of approx. $10m.
4 METRICS THAT MATTER
# paying customers?
How many customers are paying you each month
Average $ / customer / month?
How much are they paying you each month?
How many customers do you need to reach monthly revenue of $700K?
How many staff do you have?
Take this number and * by $10,000. This will get you close to your “monthly cash out” number.