FINC6025 · Entrepreneurial Finance
Managing Startup Cash Flows & Funding Requirements
Week 3 of University of Sydney FINC6025 Entrepreneurial Finance treats cash as the venture's lifeblood. It defines cash burn, cash build and net cash burn, converts net burn into a cash runway, and works through the funding pecking order, sources of finance and the cash-conversion cycle. These calculations are the quantitative backbone of the group funding proposal and recur as short-answer and case items on the final exam.
What this chapter covers
- 01The funding pecking order: established firms (internal -> debt -> equity) vs startups (internal -> equity -> debt), and why debt is 'most expensive' for startups
- 02Sources of funding: bootstrapping, accelerators/incubators, angels, VCs; venture debt with equity kickers and PIK interest
- 03Cash burn = OpEx + change in inventories - change in payables + CapEx; cash build = sales - change in receivables; net cash burn = burn - build
- 04Cash runway = current cash / net cash burn per period; typical raise every ~12-18 months
- 05Liquidity metrics: current ratio, quick ratio, net-working-capital ratio, cash-holding ratio
- 06Three break-even points on the cash curve: cash payback, accounting break-even, cash-flow break-even
- 07Short-term cash planning: the linked schedules of a cash budget (collections, disbursements, minimum-balance borrowing)
- 08Cash Conversion Cycle = Inventory-to-Sale + Sale-to-Cash - Purchase-to-Payment (days)
Net cash burn and runway for a pre-revenue SaaS
- +1Cash burn = OpEx + change in inventories - change in payables + CapEx = 180,000 + 5,000 - 20,000 + 15,000 = 180,000 dollars. (Rising payables are a source of cash, so they subtract.)
- +1Cash build = sales - change in receivables = 60,000 - 10,000 = 50,000 dollars. (Cash actually collected is less than booked sales because receivables grew.)
- +1Net cash burn = cash burn - cash build = 180,000 - 50,000 = 130,000 dollars per month.
- +1Runway = current cash / net cash burn = 1,500,000 / 130,000 = 11.5 months. So the venture must hit its next milestone and raise before roughly 11-12 months elapse.
Key terms
- Cash burn
- The cash a venture spends to run and invest in the business: OpEx + change in inventories - change in payables + CapEx. It captures outflows, with rising payables treated as a cash source that reduces burn.
- Cash build
- The cash actually collected from sales: sales - change in receivables. Booked revenue overstates cash when receivables grow, so build strips that out.
- Net cash burn
- Cash burn minus cash build — the venture's most essential forward-looking survivability indicator. It must be based on forecasts, not historical figures, because it drives how long the venture can operate.
- Cash runway
- How long a venture can operate before it must hit its next milestone or raise again, computed as current cash / net cash burn per period. Startups typically raise a new round every 12-18 months.
- Funding pecking order (startups)
- For startups the cheapest-first order is internal cash flows, then external equity, then external debt — the reverse of established firms — because startups lack collateral and stable cash flows, making debt carry a heavy agency cost.
- Cash Conversion Cycle
- The number of days of operation that must be financed: Inventory-to-Sale + Sale-to-Cash - Purchase-to-Payment. A lower cycle means fewer days of external financing; startups in the survival stage often have long, worsening cycles.
Managing Startup Cash Flows & Funding Requirements FAQ
Why is debt the 'most expensive' source for a startup?
Not because interest rates are literally highest, but because startups lack tangible-asset collateral and stable cash flows, so lending to them triggers moral hazard between borrower and lender. Banks bear the same downside as equity holders without the contingent upside, which leads to credit rationing. That is why the startup pecking order puts external equity ahead of debt, and why venture debt usually comes with an equity kicker and often the backing of existing VCs.
How do I turn net cash burn into a runway?
Divide current cash by net cash burn per period. If a venture holds 1.5 million dollars and burns 130,000 a month net, its runway is about 11.5 months. The key discipline is that the burn figure must come from forward-looking forecasts, and you should re-check it whenever assumptions change, because runway is what dictates the timing of the next raise and the milestones that must be hit first.
Do rising receivables and payables help or hurt cash?
Rising payables help: you are holding onto cash longer, so they reduce cash burn. Rising receivables hurt near-term cash: you have booked the sale but not collected it, so they reduce cash build. Getting these two signs right is a frequent source of lost marks, and it is exactly what the cash-conversion-cycle metrics formalise.
Can AI help me with the Week 3 cash-flow calculations?
Yes. Sia can walk you line by line through cash burn, cash build, net burn, runway and the cash-conversion cycle, check your signs on receivables and payables, and set fresh practice problems in the style of the group proposal and the exam. It teaches the method and checks your working; it does not do graded assessment, and the University of Sydney academic-integrity policy applies.
Exam move
Week 3 is where marks are won or lost on signs and units. Drill the burn/build/net-burn/runway chain until it is automatic, and deliberately practise the two sign traps (payables reduce burn, receivables reduce build). Build one clean template you can reproduce in the group funding proposal and reuse in the exam: forecast monthly OpEx and CapEx, layer in working-capital changes, compute net burn, then divide cash by net burn for runway. Learn the cash-conversion-cycle formula and remember 'lower is better' for the whole cycle. Because these skills carry straight into the 30% group assignment, treat your assignment model as exam practice. Confirm assessment timing on Canvas.
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