Business and Personal Finance: The Basics of Cash Flow

Always Know Your Cash – The Basics of Cash Flow

Cash flow describes the way money comes into and out of your business. As you might expect, when money comes in, it’s called cash inflow; when money goes out, it’s cash outflow. Keeping track of both sides of your cash equation is critical to the successful management of your company. For many new and small businesses, the outflow will (at least initially) exceed the inflow, and that’s called negative cash flow. Much better, of course, is the opposite situation, with more cash coming in than going out. That’s the goal to strive for: positive cash flow.

Just because you have more money going out than coming in right now doesn’t necessarily mean that you are out of cash. If you have a sufficient cash cushion to get you through slow times, similar to a personal emergency savings account, a little imbalance won’t cause a bankruptcy. However, you still need to work on establishing and maintaining a steady positive cash flow.

In order to successfully manage your cash flow, you need to know what’s going on right now and what steps you could take to make the situation better. Start with a detailed cash-flow projection, a sort of budget that tracks the cash moving into and out of your business. That will help you see where cash is going and give you some ideas to stretch out the outflow. In addition, you’ll learn how cash comes in and possibly find some ways to speed up that process. You have much more control over cash going out than you do over cash coming in, so that will be your initial cash management focus: minimizing cash shortfalls by keeping tighter reins on your cash outflow.

Creating Your Cash Projection

The first thing you need to create a cash projection is a sales projection. After all, most of your incoming cash will be a direct result of sales. Try to come up with a reasonable estimate for sales over the next six months. If your business is already off the ground, you can look at sales from the last few periods and base your forward estimates on that; if you are really just starting out, enlist your accountant to help you with some realistic sales projections. Once you have sales estimates worked out, figure out how much of those sales will be made for cash, and how much on credit. Cash sales trigger immediate cash inflows, but leave thirty to sixty days for collection on credit sales.

Next, figure out your expected cash outflows for the same six-month period. Include every check you plan to write to pay vendors and cover basic business expenses, along with any cash you plan to take out of the business (after all, you need positive cash flow in your personal life, too). Finally, put your projected outflows together with your estimated inflows and see how they stack up. Whatever the result is, combine it with the company’s cash reserves (i.e., its already existing cash balance).

What the End Results Mean

For most new and small businesses, good cash management can mean the difference between an ongoing business and a business failure. The trick of good cash management is anticipation and action: knowing what’s coming and dealing with it before it happens.

You may end up with negative cash flow in some periods, which isn’t great, but it doesn’t mean the end of your business; in fact, it’s practically unheard of for a new business to completely avoid this issue. However, ending up with a negative cash balance in your projections is a big problem, and one you’ll need to address immediately. That situation occurs when the negative cash flow uses up all of your cash reserves (or even more than that), and the company has no cash to draw from. If you anticipate a negative cash balance in the upcoming months, acting now to shore up your reserves will help you better weather the problem. At the end of this chapter, you’ll find a section on what to do when cash starts running low.


If you expect to receive cash from other sources, include that in your incoming cash projection as well. Those other sources could include additional owner contributions or loan proceeds, for example. Even though these inflows won’t be repetitive, they still belong on your cash budget.