Cash Flow Basics: Managing Your Business Money

Cash flow is the #1 reason small businesses fail - not lack of sales, but running out of cash! This guide explains cash flow in simple terms and shows you how to manage it so your business never runs dry.

What is Cash Flow?

Simple Definition: Cash flow is money moving in and out of your business.

Money IN (Inflow):

• Customer payments
• Loans
• Investments
• Interest earned

Money OUT (Outflow):

• Rent
• Payroll
• Supplies
• Utilities
• Loan payments
• Taxes

Positive Cash Flow: More money coming in than going out ✅ (Good!)
Negative Cash Flow: More money going out than coming in ⚠️ (Problem!)

Cash Flow vs. Profit: The Critical Difference

This confuses EVERYONE at first, so let’s make it crystal clear:

Profit (What You Earned)

Revenue minus expenses on paper.

💡 Example:

• You sold $50,000 of products in January (Revenue)
• Your costs were $30,000 (Expenses)
• Profit = $20,000!

Cash Flow (Money in Your Bank)

Actual money you received minus actual money you paid.

💡 Same Example, But Reality:

• You sold $50,000 worth… but customers have 30 days to pay
• You only collected $15,000 in actual cash
• You had to pay $30,000 for expenses (suppliers want payment now!)
• Cash flow = $15,000 - $30,000 = -$15,000 (You’re short $15,000!)

See the problem? You’re profitable on paper but running out of cash!

Why This Happens

Revenue Recognition: You record a sale when you make it, not when you get paid.

Timing Differences:

• Customers pay you in 30-60 days
• You pay suppliers in 15-30 days
• Employees get paid every 2 weeks
• Rent is due on the 1st

This is why 82% of small businesses fail - CASH FLOW, not profitability!

The Cash Flow Timeline

Let’s walk through a real example:

Day 1 - January 1:

• Cash in bank: $10,000

Day 5 - You buy inventory:

• Spend: $8,000
• Cash in bank: $2,000

Day 15 - Pay rent and payroll:

• Spend: $5,000
• Cash in bank: -$3,000 (Uh oh! Overdrawn!)

Day 20 - Customer pays for work you did in December:

• Receive: $7,000
• Cash in bank: $4,000 (Saved!)

Day 25 - More expenses:

• Spend: $3,000
• Cash in bank: $1,000

This is cash flow in action! Your balance goes up and down constantly.

Understanding Your Cash Conversion Cycle

The cash conversion cycle is how long it takes for $1 spent to come back to you as cash.

Formula: Days to sell inventory + Days to collect payment - Days you get to delay payment to suppliers

💡 Example - Retail Store:

• Buy inventory: $5,000
• Sits on shelf: 30 days
• Customer buys it: Day 30
• Customer gets 30 days to pay: Day 60
• You have to pay supplier in: 15 days (Day 15)

Cash conversion cycle = 30 + 30 - 15 = 45 days

You’re out of pocket for 45 days! This is why you need working capital.

How to Improve It:

• ✅ Sell inventory faster (better marketing, pricing)
• ✅ Collect from customers faster (early payment discounts, better terms)
• ✅ Delay paying suppliers (negotiate better payment terms)

The Three Types of Cash Flow

1. Operating Cash Flow (Day-to-Day Business)

Money from normal business operations.

Cash In:

• Customer payments
• Cash sales

Cash Out:

• Payroll
• Rent
• Utilities
• Supplies
• Inventory
• Marketing

Goal: Positive operating cash flow means your business is sustainable!

2. Investing Cash Flow (Buying Big Things)

Money spent on or received from long-term assets.

Cash Out:

• Buying equipment
• Purchasing vehicles
• Building improvements

Cash In:

• Selling old equipment
• Selling property

Usually negative - you’re investing in growth!

3. Financing Cash Flow (Money From Loans/Investors)

Money from loans, investments, or paying them back.

Cash In:

• Loans
• Investor money
• Owner contributions

Cash Out:

• Loan payments
• Paying back investors
• Owner withdrawals

How to Track Your Cash Flow

Method 1: Simple Weekly Cash Tracking (For Beginners)

Create a simple spreadsheet:

Week of [Date]

Starting Cash Balance:        $10,000

Cash IN this week:
- Customer payments:           $5,000
- Other income:               $500
Total IN:                     $5,500

Cash OUT this week:
- Payroll:                    -$3,000
- Rent:                       -$2,500
- Supplies:                   -$600
- Utilities:                  -$200
Total OUT:                    -$6,300

Net Cash Flow:                -$800
Ending Cash Balance:          $9,200

Do this every week! Takes 15 minutes, saves your business.

Method 2: Monthly Cash Flow Statement

For more established businesses:

Format:

Cash Flow Statement - January 2025

BEGINNING CASH:               $10,000

OPERATING ACTIVITIES:
+ Cash from customers:         $25,000
- Payroll:                    -$12,000
- Rent:                       -$2,500
- Utilities:                  -$500
- Supplies:                   -$3,000
Net Operating Cash:            $7,000

INVESTING ACTIVITIES:
- Purchase equipment:          -$5,000
Net Investing Cash:           -$5,000

FINANCING ACTIVITIES:
+ Business loan:               $10,000
- Loan payment:               -$500
Net Financing Cash:            $9,500

TOTAL CASH FLOW:              $11,500

ENDING CASH:                  $21,500

Tools to Make It Easy

Free Options:

• Spreadsheet (Google Sheets, Excel) - Start here
• Wave Accounting - Free software for small businesses
• QuickBooks Online Simple Start - $15/month, very popular

Paid Options ($50-100/month):

• QuickBooks Online - Industry standard
• Xero - Great for small businesses
• FreshBooks - Good for service businesses

💡 Pro Tip: Start simple! A spreadsheet is better than nothing. Upgrade as you grow.

Cash Flow Forecasting: Predict Problems Before They Happen

A forecast helps you see cash problems BEFORE you run out.

Simple 3-Month Forecast Template

                    Month 1    Month 2    Month 3
Starting Cash       $10,000    $8,500     $12,000

Expected Cash IN:
- Customer payments $15,000    $18,000    $20,000
- Loan proceeds     $0         $10,000    $0
Total IN:           $15,000    $28,000    $20,000

Expected Cash OUT:
- Payroll           -$10,000   -$10,000   -$12,000
- Rent              -$2,500    -$2,500    -$2,500
- Supplies          -$3,000    -$4,000    -$5,000
- Loan payment      -$500      -$500      -$500
- Equipment         $0         -$10,000   $0
- Other             -$500      -$500      -$500
Total OUT:          -$16,500   -$27,500   -$20,500

Net Cash Flow:      -$1,500    $500       -$500
Ending Cash:        $8,500     $12,000    $11,500

Red flag! Month 1 shows a $1,500 shortfall. You need to:

• Collect payments faster
• Delay some expenses
• Get a line of credit
• Add owner funds

Forecast every month! Adjust as reality differs from predictions.

Common Cash Flow Problems (And Solutions)

Problem 1: Seasonal Business

Example: Pool cleaning company makes 80% of revenue in summer.

Cash Flow Crisis:

• Winter: Barely any income
• Spring: Need to buy equipment and hire staff BEFORE revenue comes
• Run out of cash in March/April!

Solutions:

• ✅ Save 30-40% of summer profits for winter
• ✅ Get a business line of credit
• ✅ Offer winter services (maintenance, repairs)
• ✅ Charge annual contracts paid monthly (smooths income)

Problem 2: Slow-Paying Customers

Example: You’re a consultant. Clients take 60-90 days to pay.

Cash Flow Crisis:

• Do work in January
• Send invoice February 1
• Get paid April 1
• But payroll and rent due every month!

Solutions:

• ✅ Require 50% deposit upfront
• ✅ Offer 2-5% discount for payment within 10 days
• ✅ Send invoices immediately (not end of month)
• ✅ Follow up on overdue invoices weekly
• ✅ Use invoice factoring for big invoices (get 80-90% immediately)

Problem 3: Growing Too Fast

Example: Great news! Sales doubled! Bad news - you’re out of cash!

Cash Flow Crisis:

• More sales = need more inventory
• More sales = need more staff
• All those expenses happen BEFORE you collect the new revenue

Solutions:

• ✅ Get a line of credit BEFORE you need it
• ✅ Negotiate better payment terms with suppliers
• ✅ Collect deposits from customers
• ✅ Grow at a sustainable pace (10-20% per quarter, not 100% in a month)

Problem 4: Owner Draws Too Much

Example: Owner takes $5,000/month from business that only profits $3,000/month.

Cash Flow Crisis:

• Taking more than the business makes
• Eventually runs dry

Solutions:

• ✅ Set a sustainable owner salary (50-70% of profits)
• ✅ Leave money in for growth and cushion
• ✅ Take bonuses only when cash balance is healthy
• ✅ Have 3-6 months of operating expenses saved in business account

The 13-Week Cash Flow Forecast (Gold Standard)

Serious business owners forecast cash WEEKLY for the next 13 weeks (3 months).

Why 13 weeks?

• Far enough to see problems coming
• Near enough to be accurate
• Standard in business management

What it looks like:

Week    Starting    Cash IN    Cash OUT    Ending
1       $10,000     $3,000     -$4,000     $9,000
2       $9,000      $2,500     -$3,500     $8,000
3       $8,000      $4,000     -$5,000     $7,000
4       $7,000      $5,000     -$3,000     $9,000
...
13      $12,000     $6,000     -$5,500     $12,500

Red flags to watch:

• Any week ending below $5,000 (or whatever your minimum is)
• 3+ weeks of negative cash flow
• Declining trend

Update it weekly! Roll forward and adjust based on what actually happened.

Cash Flow Management Rules

Rule 1: Know Your Number

What’s the MINIMUM cash you need in the bank to sleep at night?

Formula: Minimum Cash = 1-3 months of fixed expenses

Example:

• Monthly expenses: $10,000
• Minimum: $10,000 - $30,000

When you dip below this, go into “cash preservation mode”:

• Delay non-essential expenses
• Speed up collections
• Don’t make big purchases

Rule 2: Speed Up Collections

Get money faster:

• Invoice immediately when work is done
• Offer early payment discount (2% off if paid in 10 days)
• Require deposits (30-50% upfront)
• Accept credit cards (yes, 3% fee is worth the fast payment!)
• Send payment reminders automatically
• Call customers with overdue invoices

💡 Impact: Reducing collection time from 45 to 30 days on $100K annual sales = $12,500 more cash available!

Rule 3: Slow Down Payments (Strategically)

But don’t damage relationships!

Smart strategies:

• Pay on due date, not early (why pay Day 5 if due Day 30?)
• Negotiate 30-day terms instead of 15-day
• Use a business credit card (get 30 days free)
• Ask for payment plans on big expenses

DON’T:

• Pay late without communication
• Damage supplier relationships
• Hurt your credit score

Rule 4: Build a Cash Cushion

Target: 3-6 months of operating expenses

Example:

• Monthly expenses: $15,000
• Goal cushion: $45,000 - $90,000

How to build it:

• Save 10-20% of profits each month
• Park it in a high-yield savings account
• Only touch for true emergencies
• Rebuild immediately if you use it

Rule 5: Separate Business and Personal

Never mix!

• Get a business bank account
• Get a business credit card
• Pay yourself a regular salary
• Don’t raid business account for personal expenses

Why:

• Makes cash flow tracking impossible if mixed
• Tax nightmare
• Legal liability issues
• Can’t see business health clearly

Warning Signs of Cash Flow Problems

🚨 Immediate Red Flags:

• Can’t make payroll
• Bouncing checks
• Using one credit card to pay another
• Avoiding supplier calls
• Can’t pay yourself

⚠️ Early Warning Signs:

• Cash balance declining 3+ months in a row
• Constantly using credit cards for operating expenses
• Taking longer to pay bills
• Customers paying slower
• No cash cushion left

When you see these, ACT IMMEDIATELY!

Emergency Cash Flow Fix (When You’re Almost Out)

Step 1: Immediate Actions (This Week)

• Call every customer who owes you money
• Offer discounts for immediate payment
• Delay any non-critical expenses
• Return any unneeded inventory for refund
• Use business credit card for essential expenses only

Step 2: Short-Term (This Month)

• Apply for a business line of credit
• Factoring your receivables
• Ask suppliers for extended terms
• Reduce inventory orders
• Cut non-essential spending

Step 3: Medium-Term (Next 3 Months)

• Restructure your pricing (maybe too low?)
• Renegotiate contracts
• Consider a small business loan
• Bring in a partner or investor
• Potentially downsize (smaller location, fewer staff)

Step 4: Long-Term Prevention

• Implement cash flow forecasting
• Build cash reserves
• Fix underlying business model issues
• Get professional help (accountant, consultant)

Tools and Resources

Free Cash Flow Templates:

• Google “cash flow template” for free Excel templates
• SCORE offers free templates and mentoring
• SBA has free cash flow calculators

Software (Starting at $0-15/month):

• Wave (Free)
• QuickBooks Simple Start ($15/month)
• FreshBooks ($15/month)
• Xero ($15/month)

Learning Resources:

• SCORE mentoring (free!)
• Small Business Development Centers (SBDC)
• YouTube channels: “Think Media,” “GaryVee” (general business)

Your Cash Flow Action Plan

Week 1:

• Open separate business bank account (if you haven’t)
• Set up basic cash tracking spreadsheet
• Calculate your minimum cash needs
• Review last 3 months of bank statements

Week 2:

• Create your first monthly cash flow statement
• Identify your cash conversion cycle
• List your top 3 cash flow problems
• Start tracking cash weekly

Week 3:

• Create 3-month cash flow forecast
• Set up invoicing system
• Implement faster payment collection
• Negotiate better supplier terms

Week 4:

• Review and adjust forecast
• Set cash cushion goal
• Make this a weekly habit
• Consider getting accounting software

Month 2 and Beyond:

• Weekly cash tracking and forecasting
• Monthly review and analysis
• Build cash cushion to 3-6 months
• Consider hiring a bookkeeper when you can afford it

Next Steps

Master Related Topics:

• Financing 101 - Understand funding basics
• Building Business Credit - Improve your credit for better financing
• Traditional Business Financing - When you need to borrow to fix cash flow
• Emergency Funding - Quick cash when you need it now

Get Help:

• Find a SCORE mentor (free!)
• Hire a bookkeeper ($200-500/month)
• Talk to your bank about a line of credit (get it before you need it!)

Remember: Cash flow management is a skill. You’ll get better with practice. Start simple, stay consistent, and you’ll master it!

Need personalized help with cash flow? Visit our contact page for resources and guidance.