Managing Cash Flow


Cash flow is the lifeblood of most businesses. In the ideal world, it circulates smoothly. Customers pay their bills regularly, which builds positive cash balances in your books. This cash is the money used to pay your suppliers, employees, and to fund your growth. That in turn, keeps your customers buying and paying.

However, there are many twists and turns with the cash flow process. That is why it is important to know how to utilize it best to keep your business solvent and thriving.

Basics of Cash Flow and Definitions

It is helpful to understand the terms used when accountants, bankers, and business owners talk about the cash flow process.
  • Cash flow: Quite simply, how money moves in and out of your company.
  • Negative cash flow: This occurs when the cash going out is more than what’s coming in to the business.
  • Positive cash flow: This occurs when cash from sales, accounts receivables, or other sources totals more than cash going out to salaries, accounts payable, or other expenses.
  • Inflow: The movement of funds into your cash account, usually from sales and accounts receivable.
  • Outflow: The movement of funds out of your accounts, usually from payroll, accounts payable, and overhead.
  • Cash flow analysis: A process of monitoring expenses and incoming funds to ensure your business has enough cash on hand each month to keep your company operating.
  • Profit: At the most basic level, profit equals revenue minus expenses.
  • Cash flow gap: When you need more money for current expenses than you have on hand, you have a cash flow gap.
  • Successful cash flow management: Keeping cash coming in on a steady, reliable basis, while delaying outflows as long as you can.
  • Cash flow worksheet: Represents a way to track your cash flow. Quickbooks and other accounting software make it an easy step-by-step process to put together a cash flow statement.

Comparison of Cash Flow to Profit

Profit is different from cash flow. You may realize a healthy profit at year end, yet face an unhealthy cash flow at various times of the year. Understanding your business finances is not as simple as just looking at a profit and loss statement.

Fundamentally, profit is simply your revenues minus your expenses. Cash flow, on the other hand, depends on a broad range of factors including:
  • Accounts receivable
  • Inventory
  • Accounts payable
  • Capital expenditures
  • Debt service
In essence, profit refers to income and expenses at a point in time. It is static in this regard. On the other hand, cash flow is dynamic. It involves the timing of the movement of money in and out of the business.

Tips to Improve Cash Flow

A healthy cash flow is an integral part of any successful business. Implement these suggestions as applicable to help you manage and improve the cash flow of your business.
  • Collect your receivables in a timely manner. Consider using a receivable solution from your bank to process payments more quickly. Offer discounts for quick payment. Suggest customers use depository transfer or pre-authorized checks.
  • Tighten the credit you offer. Research your customers, and don’t offer credit to everyone. Ask them to fill out a credit application. Take credit cards.
  • Increase your sales. Run a promotion to attract new customers. Offer additional products or services to your current list.
  • Apply for a short-term loan if needed.
  • Don’t pay all your bills at once. Space them out, according to projected cash flow throughout the month.
  • Pay with the cash you have on hand, not on expected sales.
  • Don’t use sales tax to pay other bills. This can backfire.
  • Consider using a payroll service. They know how to collect and pay payroll taxes, simplifying your business accounting.
  • Build a relationship with a bank that provides working capital. Do this before any cash flow gap happens.
Remember, cash flow is the heartbeat of any business, large or small. Monitor it regularly, and do what it takes to keep a smooth flow of money circulating through your company.
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