Managing Cash Flow

6 min read

By Kevin — CPA, MBA, CEO of IOL Inc.

Cash flow kills more startups than bad ideas, bad products, or bad teams. Kevin has watched profitable businesses shut down because they ran out of cash — the P&L showed profit, but the bank account was empty. Understanding cash flow isn't optional for founders. It's survival.

Cash Flow vs. Profit

Profit is an accounting concept. Cash flow is reality. You can record ₱1M in revenue (profit!) but if the customer doesn't pay for 60 days and your rent is due today, you're still broke.

The difference comes from timing. Revenue is recognized when earned (accrual accounting), but cash moves when it moves. Three common scenarios where profit and cash diverge:

• You invoiced a large project but won't collect for 2 months
• You pre-paid 6 months of rent but only expense 1 month on the P&L
• You bought equipment that's depreciated over 5 years, but cash left immediately

Burn Rate: Gross vs. Net

Gross burn is your total monthly spending — everything that goes out the door. Salaries, rent, software, marketing, everything.

Net burn is gross burn minus revenue. This is the actual amount of cash you're losing each month. If you spend ₱500K/month and earn ₱200K/month, your net burn is ₱300K/month.

Runway = Cash Balance / Net Burn. If you have ₱3M in the bank and net burn is ₱300K, you have 10 months of runway.

Runway Zones

Kevin uses a traffic light system for runway:

• Red Zone (under 3 months): Emergency. You should already be fundraising, cutting costs, or both. At this point, you're negotiating from weakness.
• Yellow Zone (3-6 months): Caution. Start preparing for your next raise. Update your pitch deck, warm up investor relationships, and begin modeling scenarios.
• Green Zone (6+ months): Healthy. You have time to execute, but don't get complacent. Monitor monthly and project forward.

When to Start Fundraising in the Philippines

Fundraising in the Philippines takes 3-6 months from first meeting to money in the bank. That means you should start raising when you have 6-9 months of runway left. Any later and you're in the yellow/red zone during negotiations.

Working Capital: DSO, DPO, and Cash Conversion

DSO (Days Sales Outstanding) — how many days before customers pay you. If DSO = 45, it takes 45 days on average to collect after invoicing. Lower is better.

DPO (Days Payable Outstanding) — how many days before you pay your suppliers. Higher DPO preserves cash (but don't damage supplier relationships).

Cash Conversion Cycle = DSO - DPO. A negative CCC is the dream — it means you collect from customers before you pay suppliers. Subscription businesses with annual prepayment achieve this naturally.

If your DSO is 45 and DPO is 30, you have a 15-day gap where you need cash to bridge. Multiply that gap by your daily expenses and you know your working capital requirement.

Kevin's Cash Flow Rules

• Maintain at least 3 months of operating expenses as a cash buffer
• Never count one-time income (grants, large contracts) as recurring for expense planning
• Target DSO under 30 days — invoice immediately, follow up relentlessly
• Negotiate 30-60 day payment terms with suppliers (increase DPO)
• Review cash position weekly, not monthly — by the time a monthly report shows a problem, it's often too late
• If Year 3 operating cash flow is still negative despite growing revenue, the business model has a structural cash problem