Revenue is vanity. Profit is sanity. Cash flow is reality.
Booking $1M in ARR means very little if the money takes 120 days to reach your account. Too many founders celebrate the booking, then panic when payroll is due.
Your runway is set by collections, not contracts.
Watch the cash cycle
Track days sales outstanding (DSO): roughly, how many days of sales are sitting in unpaid invoices at any time.
DSO = accounts receivable ÷ revenue × number of days in the period.
If you billed $300K last quarter (90 days) and $150K is still unpaid, your DSO is $150K ÷ $300K × 90 = 45 days. Half a quarter’s revenue is effectively a loan to your customers.
If your sales cycle is 30 days but your cash cycle is 90, you’re bleeding liquidity even while the pipeline looks great.
Five fixes that work
- Invoice on time. It sounds obvious. Late invoicing is one of the most common problems I find.
- Tighten payment terms. Net 30 instead of net 60, and card or ACH on file where you can.
- Bill annually or quarterly up front where customers will accept it.
- Chase early. Follow up at day one past due, not day 60.
- Watch who pays late. A customer who always pays 45 days late is costing you more than you think.
The annual contract trap
Annual prepaid contracts look ideal. Cash up front, stickier customers, cleaner forecasts.
They can also hide weak product-market fit. If customers wouldn’t renew month to month, that’s a signal, and locking them into annual deals delays it. You feel safe on cash while product problems pile up out of sight.
Use annual contracts for cash management. Then watch churn at renewal closely, because that’s where the truth shows up.
The question to ask
Not “how much did we book?” but “how much cash came in, and when?” If you can’t answer the second one quickly, that’s the first thing to fix.
Common questions
What’s a good DSO?
It depends on your terms. If you invoice on net 30, a DSO close to 30 days means customers mostly pay on time. A DSO well above your terms means collections need attention.
Is deferred revenue a good thing?
For cash, yes. Customers paid you before you delivered. But it’s a liability until you deliver, and it isn’t revenue yet. Investors and buyers will look at how much of it renews.
Why does my P&L show a profit when my bank balance is falling?
Usually timing. Revenue you haven’t collected, inventory you paid for but haven’t sold, or prepaid expenses can all make profit and cash move in different directions. The cash flow statement shows where the gap is.
How often should I look at cash?
Weekly, at minimum, for an early-stage company. Know your bank balance, what’s coming in and what’s going out in the next few weeks.
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