What is Business Cash Flow and How to Manage It

Financial metrics are an important part of owning a business. However, it’s not enough just to stay on top of your finances and check in on your key financial reports—you also need to know what they mean. Cash flow refers to the passage of money in and out of your business. At face value, this might seem like a basic concept—however, the term “cash flow” can be misused and easily confused. Here’s more on what cash flow is and how to maintain a healthy flow of cash within your business. 

How business cash flow works.

Cash flow tracks movement of money in and out of your business and can act as a good indicator of how much money you have available at any given time. When you receive money (i.e., a customer pays you), that’s a cash inflow. When you spend money (you buy materials or pay employees), that’s a cash outflow. If your outflow exceeds your inflow, that means your business has insufficient funds to meet financial obligations.

Cash flows vary from time to time. Some months, you’ll make more sales, while during others, you may accrue more expenses. Other times, you’ll work and wait for weeks to receive payment from your customers—marking a period of no cash flow despite already earning the money.

Keep in mind that cash flow tracks your money movements over a certain period. For example, if you’re tracking your cash flow over the course of a month, your reports might show a negative cash flow even if your company is making substantial profits—because you may still be waiting for customers to make their payments.

Cash flow vs. profit.

Cash flow monitors the inflow and outflow of cash through your money while profit measures how much money you have left after paying all your expenses.

It’s possible for a company to have positive cash flow and negative net income. The opposite is true, too—a company can have negative cash flow and still be a profitable business.

It’s important to remember the timing that these two metrics measure. Cash flow only recognizes money as it moves in and out of the business. If a customer makes a purchase on credit, money hasn’t moved out of the company—but a product or service has. However, revenue (or a sale) is recognized at the time of the sale even if cash hasn’t moved yet, and that’s used to measure profitability.

How does cash flow differ from working capital?

You may find that some people confuse cash flow with working capital. However, working capital factors in a company’s assets and liabilities. These are elements that could become liquid as needed to fund cash shortages. Cash flow, meanwhile, focuses solely on money that’s on the move over time.

Cash flow management for your small business.

According to a 2019 Lendio survey, cash flow is the number one challenge small businesses face. Get on top of your cash flow management with the following tips.

1. Create a budget.

Operating a business without a budget is like jumping out of an airplane without a parachute: it may feel free and thrilling for a few minutes, but it will likely come to an unfortunate ending in short order.

A business owner can obtain a financial education the hard way or the responsible way. The first responsible step is to create a budget for your business.

A budget should account for all sources of revenue and all business expenses. These include fixed expenses such as rent, recurring merchant services charges, and payroll, as well as variable expenses such as new equipment, merchant processing fees, and utilities.

Ensuring that business revenue outweighs business expenses is at the core of maintaining positive cash flow through responsible cash management. In the other direction, understanding your budget can inform your cash flow forecast.

Budgeting can also often uncover unnecessary expenses that can be eliminated or reveal inefficiencies that can be fine-tuned to save your business crucial cash.

2. Keep track of your expenses.

Managing business expenses is an ongoing, critical challenge in cash management. Armed with your budget, keep track of your business expenses in a way that’s organized, detailed, understandable, and complete.

This practice, together with all forms of record keeping, is a pillar of responsible business, and getting into the habit can save you major headaches down the road.

Imagine giving your teenage son or daughter your personal credit card, sending them off to the mall, and never asking what they bought or how much it cost! Imagine doing this over and over again. You shouldn’t be surprised later to receive a massive bill.

Don’t treat your business the same way. Know where your money is going!

3. Make sure invoices get paid on time.

One of the major ways business owners hamstring themselves from a cash flow perspective is by failing to close the gap between the moment a sale happens and eventually receiving cash from that sale.

During this gap, the missing cash that could’ve been invested in growing the business instead acts against cash flow, under “accounts receivable.”

Business owners, especially those who don’t receive cash payments in full at the moment a sale’s completed, can address this issue through proactive invoicing practices, accepting more types of payments, shortening payment windows, and other such measures.

Cash flow works best when it happens quickly!

4. Use software to track payments.

When you’re dealing with a large number of customers with various dues, amounts, and payment dates, it could become difficult for you to keep track of each payment. A good strategy that helps in managing your cash flow is to use invoicing and accounting software. Many software allow you to maintain the proper accounts of your receivables. Their online versions are mobile and tablet friendly so you can check back on payments on the go. Another advantage of using software is that the updated accounts give you a clear understanding of the financial status of your business.

5. Make sure you have enough cash on hand.

It naturally follows that one of the most important principles of doing business successfully is always having adequate cash on hand, remembering that until the cash is in your hand (or bank account, as the case may be), it can’t be considered “cash on hand” in the truest sense.

Having enough cash on hand means you can weather an unexpected hard time. It means you can invest in improving your company through acquisitions such as a new piece of equipment, a new hire, or expanded inventory.

All of this can only be done responsibly and with confidence if you’ve followed each of the previous steps.

6. Use a small business credit card.

In conjunction with a business bank account, small business owners can obtain small business credit cards. With this simple step, expenses can be better tracked, better recorded, and better timed to fit with your own business’s cash flow cycles.

To illustrate, payments could be made on the credit account next week, for example, when an account receivable has been paid in full, rather than potentially creating a cash flow problem by making the payment this week. Such an approach can also be a valuable credit building exercise.

Whereas lending institutions sometimes offer home equity lines of credit and other asset based lending opportunities, smart cash flow management using the basic options described above can keep small business owners out of deeper financial risk.

This is a balancing act, obviously, and requires financial discipline, but having a business credit card allows you much more flexibility in scheduling payments and keeping your budget and cash flow statement in proper alignment.

Commercial lending, featuring various lines of credit to meet your business’s needs, can also help greatly in these areas.

Take control of your cash flow.

It’s natural for businesses (especially seasonal ones) to go through periods of low inflows and high outflows. This doesn’t mean your business is unprofitable or unsuccessful—it just means you need to improve your cash flow or find supplementary financing to cover slow periods.

If your cash flow is hurting, you can do something about it. Consider getting a business line of credit or a short term loan to help you weather the rough periods. Financing can help keep your cash flow healthy and heading in the right direction.

Manage your finances with confidence.

View loan offers, receive payments, and track your cash flow with the Lendio mobile app.

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The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice, and all information, content, and materials contained within are for general-information purposes only. Readers of this post should contact their attorney, business advisor, or tax advisor to obtain advice with respect to any particular matter.