Intro to Crypto Cash Flow Management

No matter how profitable an organization is, it still needs cash on hand to meet its financial obligations. In fact, 17% of SMB owners polled in a Federal Reserve survey stated they would have to close their businesses if faced with a two-month revenue loss.

Cash flow management is a tool enterprises leverage to avoid the above case by monitoring, analyzing, and optimizing their cash inflows and outflows. And Web3 projects are no exception. But crypto is a tricky market, and the industry's organizations must take into account its unique characteristics for efficient cash flow management.

This article introduces readers to crypto cash flow management, discussing the following topics:

• The digital asset market's unique challenges for managing crypto revenue streams and cash flow

• Effectively managing, forecasting, and reporting cryptocurrency cash flow as a Web3 enterprise

• Streamlining crypto cash flow management

Crypto Cash Flow Management Challenges

From impairment testing to tax reconciliation, Web3 CFOs have to consider the cryptocurrency market's unique nature to account for their organizations' transactions. This also applies to crypto cash flow management, where they must tackle multiple new challenges to accurately predict how much money will be available to cover debts and expenses.

1. Cyclical Market

Crypto is a cyclical market with a drastic difference in business revenue during bullish and bearish periods. In fact, historical price patterns suggest that every cycle lasts around four years, with each kickstarted by a new Bitcoin halving event.

At the peak of the bull market, digital asset prices tend to reach new highs, with user activity staying at the highest level during the cycle. But as bears take charge, both cryptocurrency prices and community engagement take a significant hit.

Due to the above, Web3 organizations may face substantial discrepancies in revenue, making forecasts more challenging for accountants. Simultaneously, they could also lead to negative cash flows due to overspending during bull markets and reduced cash inflows after prices have reached the bottom.

2. Asset Volatility

Besides the market itself, digital asset prices are also subject to rapid changes. As most Web3 organizations receive inflows and send outflows in several different cryptocurrencies, this increased volatility makes it harder to forecast how much cash they will have on hand to cover financial obligations.

Moreover, a Web3 project's cash flow (CFI) could fluctuate with cryptocurrencies' volatility and the state of the market.

For example, an organization could have generated $4.81 million through asset sales by disposing of 1,000 ETH at the peak of the bull run on November 9, 2021. On the other hand, selling the same 1,000 ETH at the market bottom on June 19, 2022 would only realize $993,000 of revenue for the project.

3. Accounting Complexities

Regarding the crypto market, certain factors should also be highlighted that could make the accounting process more complex for Web3 CFOs.

Unlike a brick-and-mortar business that offers products and services in a single currency, most Web3 organizations manage cash flow in numerous fiat and digital assets. Besides increasing volatility-related risks, doing so requires accountants to calculate the exchange rates for several instruments and track transactions across multiple wallets, CEX accounts, and bank accounts.

Furthermore, Web3 organizations often deal with a large volume of cash inflows and outflows as part of their operating activities. Handling this process manually is time-consuming, inefficient, and prone to errors.

How to Effectively Manage and Forecast Crypto Cash Flow as an Enterprise?

Efficient crypto cash flow management involves cash flow statements and forecasts, as well as applying best practices to tackle common challenges.

1. Create a Cash Flow Statement (CFS)

To get started, let's first create a cash flow statement (CFS). The CFS is a financial report that summarizes an organization's cash inflows and outflows for a given period. Unlike forecasts, it focuses on past transactions and paints a picture of the project's cash management.

Every CFS must include cash inflows and outflows across three main sections:

1. Cash flow from operations (CFO): The money that comes from ordinary operations (e.g., product sales, interest payments, salary and wage payments, and rent payments). In general, a positive CFO could indicate the long-term viability of a company.

2. Cash flow from investing (CFI): The cash that has been generated or spent on investments and related activities.

3. Cash flow from financing (CFF): The cash paid to shareholders and received from investors and financial institutions.

As per the FASB's guidance, GAAP-compliant organizations may also need to include a disclosure of their non-cash activities in their cash flow statements.

Complementing the balance sheet and the income statement, the cash flow statement provides CFOs insight into where an organization's money comes from and how it is being spent. Simultaneously, investors and creditors can leverage the report to determine the business' liquidity and its ability to cover its debts and expenses.

Let's see an example to better understand this. Suppose a Web3 organization shared a cash flow statement with the following figures with its stakeholders:

• Opening balance: $2 million

• Net CFO: -$7 million

• Net CFI: $1 million

• Net CFF: $10 million

• Closing balance: $6 million

While the organization managed to triple its cash balance by the end of the period, the cash flow statement indicates that it could face financial challenges in the future due to its negative CFO.

2. Forecast Future Cash Flow

Crypto cash flow management also involves forecasting future inflows and outflows. This way, Web3 organizations can identify potential cash shortages and other challenges in time, develop the necessary strategies to tackle them and determine whether more money is flowing in the project's treasury than out.

The primary components of cash flow forecasts are the following:

• Starting balance

• Expected inflows

• Expected outflows

• Net cash flow (expected inflows minus expected outflows)

• Closing balance (net cash flow plus the starting balance)

To forecast cash flow, Web3 accountants must first decide how far out they seek to plan ahead. After that, they should use data (e.g., sales receipts, invoices, utility bills) to list all the revenue and expenses that are expected to occur during the given period.

The above should be enough to estimate the net cash flow for the period and the closing balance. To ensure the accuracy of the reports, update forecasts regularly with fresh data and reconcile them against cash flow statements for the same period.

3. Apply Best Practices

To avoid cash shortages and ensure the long-term viability of their financials, Web3 organizations should consider applying the best practices of crypto cash flow management, including:

• Maintain cash reserves to survive the cyclical market and mitigate volatility-related risks

• Create a budget based on cash flow forecasts and realistic goals

• Ensure the viability of growth plans to prevent uncontrolled expansion

• Relying on cash flows from financing and investing may work for a time, but the long-term goal should be a positive operating cash flow

• Improve forecasting accuracy and cash flow visibility with the right accounting tools

Take Crypto Cash Flow Management to the Next Level

Crypto cash flow management helps Web3 organizations spot and mitigate cash shortages, gain valuable insights into their finances, and utilize their funds more efficiently. And with the right tool, they can streamline the process, supercharge decision-making, and optimize forecasts' accuracy.

Integral's enterprise-grade Web3 accounting stack automatically classifies over 90% of organizations' transactions to save time for CFOs.

Projects can integrate all their wallets, bank accounts, custodians, safes, and CEX accounts to gain real-time visibility of their assets, balances, and cash flows with minute-by-minute pricing. Besides the ability to generate a wide range of reports, Integral can also provide strategic cash flow forecasts for clients.

Take your accounting to the next level with Integral. Book a demo with our team, and we will help you get started in no time!