Why Cash Flow Management Matters
Cash flow is the lifeblood of your business. You can be profitable on paper and still fail if you run out of cash. This guide covers everything you need to know about managing, forecasting, and improving cash flow in your small business.
Core Topics
Understanding Cash Flow
- Cash flow vs. profit: What's the difference?
- Cash flow statement basics
- Operating, investing, and financing activities
- Key cash flow metrics to track
Cash Flow Forecasting
- 13-week cash flow forecast template
- Forecasting receivables and payables
- Scenario planning for cash needs
- Using forecasts for decision-making
Improving Cash Flow
- Accelerating receivables collection
- Managing payment terms strategically
- Reducing cash conversion cycle
- Building cash reserves
Common Mistakes
- Confusing profit with cash
- Over-investing in growth too quickly
- Poor payment term management
- Not tracking cash flow regularly
Understanding Cash Flow
Cash Flow vs. Profit: The Critical Difference
Profit is revenue minus expenses on your income statement—it's an accounting measure that doesn't reflect when money actually moves.
Cash flow is the actual movement of money in and out of your business. You can have a profitable month and still run out of cash if customers haven't paid yet.
Example:
You invoice $50,000 in January (profit: +$50,000). But if the customer pays on Net 30 terms, you won't see cash until February. If payroll is due January 15th, you have a cash problem even though you're profitable.
The Cash Flow Statement
Your cash flow statement has three sections:
- Operating Activities: Cash from day-to-day business operations
- Investing Activities: Cash spent on or received from assets (equipment, vehicles, etc.)
- Financing Activities: Cash from loans, lines of credit, or owner contributions
Key metric: Operating cash flow should be positive most months. If it's consistently negative, your core business model needs adjustment.
Essential Cash Flow Metrics
- Days Sales Outstanding (DSO): How long it takes to collect payment. Lower is better. Target: <30 days.
- Days Payable Outstanding (DPO): How long you take to pay vendors. Higher gives you more cash runway.
- Cash Conversion Cycle: DSO + Days Inventory Outstanding - DPO. This is how long cash is tied up.
- Operating Cash Flow Ratio: Operating cash flow ÷ Current liabilities. Target: >1.0
Cash Flow Forecasting
Why Forecast Cash Flow?
A cash flow forecast tells you when money will be available, helping you:
- Avoid surprises and cash crunches
- Make better decisions about hiring, equipment, and growth
- Negotiate better terms with vendors and banks
- Sleep better knowing what's coming
13-Week Cash Flow Forecast
The gold standard for small business cash management is a 13-week rolling forecast. Update it weekly.
What to Include:
- Beginning Cash Balance: How much cash you have at week start
- Cash In: Collections from customers, loan proceeds, other income
- Cash Out: Payroll, rent, vendor payments, loan payments
- Net Cash Flow: Cash In - Cash Out
- Ending Cash Balance: Beginning Balance + Net Cash Flow
Pro tip: Build in a 10-15% buffer for unexpected expenses. Reality rarely matches forecasts perfectly.
Forecasting Receivables
Don't forecast based on when you invoice—forecast based on when customers actually pay.
- Track your average collection period (DSO)
- Segment by customer type (commercial pays slower than residential)
- Factor in seasonality and holidays
- Build in a 5-10% non-collection rate
Improving Cash Flow
Accelerate Receivables
- Invoice immediately: Same-day invoicing = faster payment
- Offer early payment discounts: 2% discount for payment within 10 days
- Accept multiple payment methods: Credit cards, ACH, checks
- Send reminders: At 15, 30, and 45 days
- Require deposits: 25-50% upfront for larger jobs
Manage Payment Terms Strategically
You don't have to pay vendors the moment the bill arrives. Negotiate and use terms to your advantage:
- Pay on the due date, not before (preserve cash)
- Negotiate Net 30 or Net 45 with key vendors
- Use a credit card for 30-day float (if you pay it off monthly)
- Prioritize critical vendors; delay non-critical ones if needed
Reduce Cash Conversion Cycle
The faster you can convert work into cash, the healthier your business. Focus on:
- Shortening project timelines
- Invoicing progressively (not waiting until job completion)
- Reducing inventory holding periods
- Collecting faster than you pay out
Build Cash Reserves
Target: 3-6 months of operating expenses in a business savings account.
This buffer protects you from:
- Slow months (seasonality)
- Large unexpected expenses (equipment failure)
- Customer payment delays
- Economic downturns
How to build it: Set aside 5-10% of revenue every month. Automate the transfer so you don't skip it.
Common Cash Flow Mistakes
❌ Mistake #1: Confusing Profit with Cash
The problem: You see profit on your P&L and assume you have cash to spend.
The fix: Check your cash flow statement and bank balance before making spending decisions.
❌ Mistake #2: Growing Too Fast
The problem: Every new job requires cash outlay before you get paid. Rapid growth = rapid cash drain.
The fix: Forecast cash needs for growth. Require deposits. Consider a line of credit before you need it.
❌ Mistake #3: Not Tracking Cash Weekly
The problem: You only look at cash monthly, missing early warning signs.
The fix: Review cash balance and forecast every week. Set alerts for low balances.
❌ Mistake #4: Offering Bad Payment Terms
The problem: You let customers pay Net 60 while your vendors expect Net 15.
The fix: Align customer terms with vendor terms. If you pay in 15 days, collect in 15-30 days.
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