cash flow of business plan

Cash Flow Basics for Small Business Explained

Noah Parsons

13 min. read

Updated May 11, 2024

Cash is the lifeblood of every business, and running out of it is the number one reason that small businesses fail. Even if you are making plenty of sales, if you don’t have enough cash in the bank your business won’t be able to pay its bills and stay open.

That’s why it’s so important for businesses to understand the basics of cash flow and cash flow forecasting. We’ll be covering those elements and more throughout this guide.

• What is cash flow?

Cash flow measures how much money moves into and out of your business during a specific period.

Businesses bring in money through sales, returns on investments, and loans and investments—that’s cash flowing into the business.

And businesses spend money on supplies and services, utilities, taxes, loan payments, and other bills—that’s cash flowing out.

Cash flow is measured by comparing how much money flows into a business during a certain period to how much money flows out of that business during that period. 

You usually measure cash flow over a month or a quarter.

• How to calculate cash flow

The simplest formula for calculating cash flow is:

CASH RECEIVED – CASH SPENT = NET CASH FLOW

If your net cash flow number is positive, your business is cash flow positive, and accumulating cash in the bank.

If your net cash flow number is negative, your business is cash flow negative, and you are finishing the month with less cash than you started with.

What’s the difference between Cash and Profit?

Believe it or not, it’s possible for your business to be profitable but still run out of cash. That may not be intuitive initially, but it’s because cash and profits are very different. Here’s why.

Profits can include sales you’ve made but haven’t been paid for yet.

Cash, on the other hand, is the amount of money you actually have in your bank account. It represents your business’s liquidity; it’s not cash if you can’t use it right now to pay your bills.

For example, if you’re making a lot of sales but you invoice your customers, and they pay you “net 30,” or within 30 days of receiving the invoice, you could have lots of revenue on paper but not a lot of cash in your bank account because your customers haven’t paid you yet. Those sales will only show up on your income statement .

If the money your customers owe you hasn’t entered your bank account, it won’t appear on your cash flow statement yet. It isn’t available to your business at this point. It’s still in your customers’ hands, even though you’ve invoiced them. You keep track of the money your customers owe you in accounts receivable .

Meanwhile, you can only pay your bills with real cash in your bank account. It will be tough to fulfill orders, meet payroll, and pay rent without that cash. That’s why keeping track of cash flow is so important. 

To keep your business afloat, you need to have a good sense of what comes in and what goes out of your business every month and do everything you can to remain cash flow positive.

Dig deeper:

The difference between cash and profits

Learn more about the specific differences between cash and profits and how they impact your business.

The difference between cash flow and working capital

Cash flow and working capital tell different financial stories about your business. Cash flow deals with money moving in and out of your business while working capital compares assets and liabilities.

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• How to analyze a cash flow statement

When analyzing your historical cash flow statement, you’re looking at the amount of real cash you have on hand at the beginning of the month, compared to your cash at the end of the month. 

You can also look at your cash flow over different time frames – quarterly, for example – but a good rule of thumb is to regularly look at your cash flow to better understand any changes in the health of your business.

To see a visual example of how this works within a business, you can download this free cash flow example as a PDF or Excel sheet .

When conducting a cash flow analysis, you’ll want to be sure you understand the following key terms. 

Positive cash flow

Positive cash flow is defined as ending up with more liquid money on hand at the end of a given period of time compared to what was available when that period began.

Let’s say you started with $1000 in cash at the beginning of the month. You paid $500 in bills and expenses, and your customers paid you $2,000 for your services. Good news: Your cash flow is positive, at $1,500 for the month, leaving you with $2500 in cash.

If you have positive trending cash flow, it’s easier to:

• Pay your bills: Positive cash flow ensures employees get checks during each payroll cycle. It also gives decision makers the funds they need to pay suppliers, creditors, and the government.
• Invest in new opportunities: Today’s business world moves quickly. When cash is readily available, business owners can invest in opportunities that may arise at any given point in time.
• Stomach the unpredictable: Having access to cash means that whenever equipment breaks, clients don’t pay their invoices on time, or when new government regulations come into effect, businesses can survive.

Negative cash flow

Negative cash flow is when more cash is leaving the business than is coming in. When cash flow is negative, the amount of cash in your bank account is shrinking. This might not be a problem if your business has plenty of cash in the bank. But, it does mean that your business will eventually run out of money if it doesn’t become cash flow positive at some point.

Let’s say you started with $2,000 in the bank at the beginning of the month. You paid $1,500 in bills and expenses, and even though you did plenty of work and invoiced your customers for $3,000 worth of services, your customers only actually paid you $200. You’re still waiting for the rest of your payments to come in. Your cash flow is negative: -$1,300 for the month, leaving you with only $700 in cash.

If you don’t have any reserves, your rent check might bounce. If you have an established line of credit, you might rely on that to pay part of your bills. Maybe you forecasted your cash flow and knew that you were going to be short that month, so you made a plan to cover your expenses.

One month of negative cash flow won’t necessarily tank your business. But your business is at risk when you start to see a trend, and you don’t do nothing to reverse it (or when you’re unpleasantly surprised because you haven’t been tracking your cash flow). 

Cash Burn Rate and Runway

New businesses and startups often have negative cash flow when starting. They have lots of bills to pay while they’re getting up and running, and there aren’t a lot of sales yet. As revenue from sales starts to come in, hopefully, cash will flow into the business instead of just flowing out. 

This is why new businesses often need investment and loans to get started—they need cash in the bank to cover all of the negative cash flow during the business’s early days.

When starting out, it’s important to track Cash Burn Rate, which is essentially your negative cash flow number – the amount of money you are “burning” each month. You can then use that number to determine how many months of cash you have left – this is your “runway.” 

Read our detailed explanation of cash burn rate and cash runway to learn more about how to find, measure, and adjust these metrics.

Negative cash flow can also happen when a business chooses to invest in a new opportunity. The business could be betting that investing in a new opportunity now will pay off in the future. That investment could cause negative cash flow for some time, so it’s important to keep a close eye on cash and have a solid cash flow forecast in place so you know if your business is on track to stay in the black.

How positive and negative cash flow impact your business

Learn more about your relationship with positive and negative cash flow and how understanding these concepts will help you better understand your business health.

The importance of your burn rate and cash runway

Learn to calculate how much cash you’re using up and how long you have until it’s depleted.

15 tips for dealing with clients who won’t pay

A major factor that impacts your positive cash flow is clients paying on time. If delays in payment are leading to a cash flow crunch, there are a few things worth trying.

• Why cash flow forecasting is important

You’ll want to monitor your historical cash flow at least once a month so you can start spotting trends with what’s actually happening with your cash inflow and outflow.

But it’s not just measuring the past and present, forecasting your cash flow can also help you anticipate when your business might run low on cash in the future. You can then plan ahead and open a line of credit or find other loans and investments to help you cover that point in the future when you’re going to need a little extra cash.

It’s a lot easier to get help from a bank or investor before you’re actually in a crisis where you’re not sure you can cover your bills. If you wait until you’re really in trouble to take action, lenders may see you as too much of a risk and turn down your request.

Your cash flow forecast can also help you plan the best time to make a big purchase, like a new piece of equipment or a company vehicle.

Don’t forget to account for the unknown, though. Business owners can’t predict the future—particularly when it comes to any unforeseen expenses they might incur (e.g., a truck breaking down prematurely and needing replacement, or a data breach resulting in a forced increase in IT spend). And they also can’t know for certain that their clients will pay their bills on time.

So, when you’re forecasting or looking at your cash flow statement for last month, remember that having some buffer is a good thing. You don’t want to be in a position where you’ve allocated every single penny, to the point where you can’t accommodate unexpected expenses.

Part of reviewing your cash flow should be thinking about risk, and the effect an unexpected expense will have on your available cash—and ultimately, your ability to pay your bills.

How to forecast your cash flow and build a cash flow statement

A cash flow projection is all about predicting your money needs in advance. 

Unfortunately, though, forecasting your cash flow is a bit more complicated than forecasting other aspects of your business such as your sales and expenses. Your cash flow statement takes inputs from your revenue projections, your expense projections, and also your inventory purchase plans if your business keeps inventory on hand.

In addition to that, you need to predict when your customers will pay you – will all of them pay on time? Or will some take longer to pay?

A tool like LivePlan can greatly simplify cash flow forecasting, but you can also do it yourself with spreadsheets.

There are two methods you can use to build a cash flow statement : the direct method and the indirect method. While they will both arrive at the same end-result and predict how much cash you will have in the bank in the future, they accomplish that goal in different ways.

The direct method of forecasting cash flow

The direct method provides a very clear view of how cash moves in and out of a business. You essentially add up all the cash your business has received from various sources and then subtract all the cash that is paid out to suppliers, vendors, employees, etc. 

This number will be the amount of cash you’ve added or subtracted from your bank account during the month.

The indirect method of forecasting cash flow

The indirect method starts with your net income from your Profit and Loss Statement and then makes adjustments to that number to account for non-cash expenses such as depreciation. 

From there you make adjustments to account for changes in inventory, accounts receivable , and accounts payable .

The indirect method is very common for building historical cash flow statements because the required numbers are all easily generated from your accounting system. This makes it a fairly popular method for forecasting cash flow. 

However, the direct method is generally easier for people who aren’t as familiar with the intricacies of accounting.

Read our guide for a more detailed explanation of the two methods of creating a cash flow statement .

Forecasting cash flow

If you’re forecasting cash flow using spreadsheets, I recommend using the direct method. It’s easier and more straightforward.

Essentially, you want to create future estimates of when you’ll receive money from customers and when you’ll pay your bills. 

It’s not critical to forecast every invoice and bill payment, though. Forecasting is about helping you make strategic decisions about your business, so making broader estimates in your forecast is OK.

How to manage cash flow with an accurate forecast

Learn how to leverage your cash flow forecast to actively manage your business and improve your chances for growth.

• How to improve your cash flow

If your cash flow is negative or you’re just looking for ways to improve your cash flow in general, there are plenty of options available. Here’s a quick list of things you can do:

• Convince your customers to pay you faster
• Pay your own bills a bit slower
• Purchase less inventory and keep less inventory on hand
• Follow up on bad debts
• Establish a line of credit or other type of business loan

Depending on your situation, you may use these methods or even consider more drastic measures if the broader economy is impacting your ability to create positive cash flow.

Tips to improve your cash flow

Are you struggling to maintain healthy cash flow? Check out these ten tips to improve the health of your business.

How to prevent cash flow problems

The best way to improve your cash flow is by preventing problems before they ever start. Here are four ways to do it.

How to manage cash flow in a crisis

Here are five tips to help strengthen your cash position and keep your business healthy even when dealing with terrible circumstances.

How to balance cash flow in a seasonal business

Seasonal businesses have unique challenges you’ll want to consider, including variations on cash flow management. Check out these techniques to effectively balance your cash flow and avoid seasonal surprises.

Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.

Table of Contents

• Cash vs profit
• How to forecast cash flow

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• Example of a cashflow
• Business Finance
• Business plans and cashflow
• Back to Business plans and cashflow
• Writing your business plan
• Example of a business plan

As well as your business plan, a set of financial statements detailing you cashflow is essential. This will provide details of actual cash required by your business on a day-to-day, month-to-month and year-to-year basis.

The needs of a business constantly change and your cashflow will highlight any shortfalls in cash that will need to be bridged. Many established, viable, and even profitable businesses fail due to cash not being available when they need it most.

Good cashflow management is critical to running a successful business. You must be able to pay your bills while you await payment from your customers. There are many well-documented cases of businesses failing not because they weren't profitable but due to poor cashflow management.

You're in business to make a profit. It's a simple principle, but one that can occasionally become lost amid dreams of building multinational empires worth millions of pounds. You won't be able to stay in business, however, unless you have cash, hence the famous adage 'cash is king'.

There will probably be a time lag between your business providing its goods or services and getting paid. This means you have to make sure there is sufficient cash in your company's bank account for it to pay all its bills in the meantime – whether these relate to invoices from suppliers, employees' wages, rent, rates, tax, VAT or anything else.

Even if your business is profitable, there may be times when you are short of cash because you are awaiting payment for a large order. This is likely to be a particular problem during your first year when you are building up your business and don't have regular cash inflows.

The general principle of cashflow management is that you should speed up your cash inflows (customer payments, interest from bank accounts etc) and slow down your cash outflows within reason (purchase of stock and equipment, loan repayments and tax charges etc) as much as possible.

It can be difficult to affect your outflows other than extending your credit terms with your suppliers, which will often occur on fixed dates in the month and your employees and suppliers might also not take too kindly to you delaying payment to them. But there is more scope for you to improve your cash inflows.

This could mean billing regularly, chasing bad debt, selling your debt to a third party (factoring), negotiating extended credit terms with suppliers, managing your stock effectively (which could entail ordering little and often) and giving your customers 30-day payment terms.

Also, as businesses naturally have peaks and troughs, it is important that you put money away during the peaks so that you can dip into it during the troughs.

It is a good idea to think about investing in some accounting software to help you manage your cashflow. There are many software providers: an internet search should reveal the most common. Most provide software that can help you with cashflow analysis and forecasting, so that your business is never caught short of cash in the bank. Your accountant should be able to help advise you on which software package to buy.

How to use the cashflow forecast template

Our cashflow template will show you how a cashflow works and should be amended to suit your own business.

All figures to be entered are actual cash. This includes bank payments and receipts, cheques, bank transfers, cash payments and receipts – all of these should be included in your opening balance.  

Then complete the shaded area opening balance, which includes bank, loan and cash balances and should be put in the sheets:

• monthly cashflow forecast
• monthly actual cashflow

This provides the starting point for the rest of the cashflow. Next, input your month 1 forecast – all the sales broken down into the elements of your particular business – and do the same for expenditure. Base your figures on your own experience and what you forecast to receive or pay. The sections can be amended to reflect your business's requirements.

Repeat this process for the actual cashflow; here the figures you input are based on actual. This should then automatically be displayed in the third sheet:

• monthly cashflow forecast/actual comparison

This is where the real analysis work is done and will determine the accuracy of your forecast figures. The forecasts sheet should be used to determine when you may have a cash shortfall before the event arises and will help determine whether you will need to obtain additional funding.

Download the cashflow template from 'Related documents'.

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What Is Cash Flow?

• Formula & Calculation

Understanding Cash Flow

• Financial Statement
• Analyzing Cash Flows

Example of Cash Flow

The bottom line.

• Corporate Finance

Cash Flow: What It Is, How It Works, and How to Analyze It

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Cash flow is the net cash and cash equivalents transferred in and out of a company. Cash received represents inflows, while money spent represents outflows. A company creates value for shareholders through its ability to generate positive cash flows and maximize long-term free cash flow (FCF) . This is the cash from normal business operations after subtracting any money spent on capital expenditures (CapEx) .

Key Takeaways

• Cash flow is the movement of money in and out of a company.
• Cash received signifies inflows, and cash spent is outflows.
• The cash flow statement is a financial statement that reports a company's sources and use of cash over time.
• A company's cash flow can be categorized as cash flows from operations, investing, and financing.

Investopedia / NoNo Flores

Formula and Calculation of Cash Flow

You can easily calculate a company's cash flow using the formula below. To do this, make sure you locate the total cash inflow and the total cash outflow.

CF = TCI - TCO

• TCI = Total cash inflow
• TCO = Total cash outflow

Cash flow refers to the money that goes in and out of a business. Businesses take in money from sales as revenues (inflow) and spend money on expenses (outflow). They may also receive income from interest, investments, royalties , and licensing agreements and sell products on credit. Assessing cash flows is essential for evaluating a company’s liquidity , flexibility, and overall financial performance.

Positive cash flow indicates that a company's liquid assets are increasing, enabling it to cover obligations, reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against future financial challenges. Companies with strong financial flexibility fare better, especially when the economy experiences a downturn, by avoiding the costs of financial distress .

Cash flows are analyzed using the cash flow statement , which is a standard financial statement that reports a company's cash source and use over a specified period. Corporate management, analysts, and investors use this statement to determine how well a company earns to pay its debts and manage its operating expenses. The cash flow statement is an important financial statement issued by a company, along with the balance sheet and income statement.

Cash Flow Statement

The cash flow statement acts as a corporate checkbook to reconcile a company's balance sheet and income statement . The cash flow statement includes the bottom line , recorded as the net increase/decrease in cash and cash equivalents (CCE) .

The bottom line reports the overall change in the company's cash and its equivalents over the last period. The difference between the current CCE and that of the previous year or the previous quarter should have the same number as the number at the bottom of the statement of cash flows.

Types of Cash Flow

Cash flows from operations (cfo).

Cash flow from operations (CFO) describes money flows involved directly with the production and sale of goods from ordinary operations. Also known as operating cash flow , CFO indicates whether or not a company has enough funds coming in to pay its bills or operating expenses .

Operating cash flow is calculated by taking cash received from sales and subtracting operating expenses that were paid in cash for the period. Operating cash flow is recorded on a company's cash flow statement, indicates whether a company can generate enough cash flow to maintain and expand operations, and shows when a company may need external financing for capital expansion.

Cash Flows From Investing (CFI)

Cash flow from investing (CFI) or investing cash flow reports how much cash has been generated or spent from various investment-related activities in a specific period. Investing activities include purchases of speculative assets , investments in securities, or sales of securities or assets.

Negative cash flow from investing activities might be due to significant amounts of cash being invested in the company, such as research and development (R&D) , and is not always a warning sign.

Cash Flows From Financing (CFF)

Cash flows from financing (CFF) shows the net flows of cash used to fund the company and its capital. CFI is also commonly referred to as financing cash flow . Financing activities include transactions involving issuing debt, equity, and paying dividends.

Cash flow from financing activities provides investors insight into a company’s financial strength and how well its capital structure is managed.

How to Analyze Cash Flows

Using the cash flow statement in conjunction with other financial statements can help analysts and investors arrive at various metrics and ratios used to make informed decisions and recommendations.

Below is Walmart's ( WMT ) cash flow statement for the fiscal year ending on Jan. 31, 2024. All amounts are in millions of U.S. dollars.

Investments in property, plant, and equipment (PP&E) and acquisitions of other businesses are accounted for in the cash flow from the investing activities section. Proceeds from issuing long-term debt, debt repayments, and dividends paid out are accounted for in the cash flow from the financing activities section.

Walmart's cash flow was positive, showing an increase of $1.09 billion, which indicates that it retained cash in the business and added to its reserves to handle short-term liabilities and fluctuations in the future.

How Are Cash Flows Different Than Revenues?

Revenue is the income earned from selling goods and services. If an item is sold on credit or via a subscription payment plan, money may not yet be received from those sales and are booked as accounts receivable. These do not represent actual cash flows into the company at the time. Cash flows also track outflows and inflows and categorize them by the source or use.

What Is the Difference Between Cash Flow and Profit?

Cash flow isn't the same as profit. Profit is specifically used to measure a company's financial success or how much money it makes overall. This is the amount of money that is left after a company pays off all its obligations. Profit is found by subtracting a company's expenses from its revenues.

What Is Free Cash Flow and Why Is It Important?

Free cash flow is left over after a company pays for its operating expenses and CapEx. It is the remaining money after items like payroll, rent, and taxes. Companies are free to use FCF as they please.

Do Companies Need to Report a Cash Flow Statement?

The cash flow statement complements the balance sheet and income statement. It is part of a public company's financial reporting requirements since 1987.

Why Is the Price-to-Cash Flows Ratio Used?

The price-to-cash flow (P/CF) ratio is a stock multiple that measures the value of a stock’s price relative to its operating cash flow per share. This ratio uses operating cash flow , which adds back non-cash expenses such as depreciation and amortization to net income.

P/CF is especially useful for valuing stocks with positive cash flow but are not profitable because of large  non-cash charges .

Cash flow refers to money that goes in and out. Companies with a positive cash flow have more money coming in, while a negative cash flow indicates higher spending. Net cash flow equals the total cash inflows minus the total cash outflows.

U.S. Securities and Exchange Commission. " Beginners' Guide to Financial Statements ."

U.S. Securities and Exchange Commission. " Explanation of Non-GAAP and Other Financial Measures ."

U.S. Securities and Exchange Commission. " Form 10-K ," Page 5.

FASB. " Summary of Statement No. 95 ."

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• Cash Flow Projection – The Comple...

Cash Flow Projection – The Complete Guide

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Key Takeaways

• Cash flow projection is a vital tool for financial decision-making, providing a clear view of future cash movements.
• Cash flow is crucial for business survival and includes managing cash effectively and providing a financial planning roadmap.
• Automation in cash flow management is a game-changer. It enhances accuracy, efficiency, and scalability in projecting cash flows, helping businesses avoid common pitfalls.

Introduction

Cash flow is the lifeblood of any business. Yet, many companies constantly face the looming threat of cash shortages, often leading to their downfall. Despite its paramount importance, cash flow management can be overwhelming, leaving businesses uncertain about their financial stability.

But fear not, there’s a straightforward solution to this common problem – cash flow projection. By mastering the art of cash flow projection, you can gain better control over your finances and steer your business away from potential financial crises. Cash flow projections offer a proactive approach to managing cash flow, enabling you to anticipate challenges and make informed decisions to safeguard the future of your business.

If you’re unsure how to accurately perform cash flow projections or if you’re new to the concept altogether, this article explains everything you need to know, provides you with a step-by-step guide to preparing cash flow projections and highlights the key role automation plays in enhancing the effectiveness of these projections. 

What Is Cash Flow Projection?

Cash flow projection is a financial forecast that estimates the future inflows and outflows of cash for a specified period, typically using a cash flow projection template. It helps businesses anticipate liquidity needs, plan investments, and ensure financial stability.

Think of cash flow projection as a financial crystal ball that allows you to peek into the future of your business’s cash movements. It involves mapping out the expected cash inflows (receivables) from sales, investments, and financing activities and the anticipated cash outflows (payables) for expenses, investments, and debt repayments.

It provides invaluable foresight into your business’s anticipated cash position, helping you plan for potential shortfalls, identify surplus funds, and make informed financial decisions.

Why Are Cash Flow Projections Important for Your Business?

Managing cash flow is a critical aspect of running a successful business. It can be the determining factor between flourishing and filing for Chapter 11  bankruptcy .

In fact, studies reveal that 30% of business failures stem from running out of money. To avoid such a fate, by understanding and predicting the inflow and outflow of cash, businesses can make informed decisions, plan effectively, and steer clear of potential financial disasters.

Calculating projected cash flow is a crucial process for businesses to anticipate their future financial health and make informed decisions. This process involves forecasting expected cash inflows and outflows over a specific period using historical data, sales forecasts, expense projections, and other relevant information. Regularly updating and reviewing projected cash flow helps businesses identify potential cash shortages or surpluses, allowing for proactive cash management strategies and financial planning.

Cash Flow Projection vs. Cash Flow Forecast

Having control over your cash flow is the key to a successful business. By understanding the differences between cash flow forecasts and projections, business owners can use these tools more effectively to manage their finances and plan for the future. 

Step-by-Step Guide to Creating a Cash Flow Projection

An effective cash flow projection enables better management of business finances. Here is a step-by-step process to create cash flow projections:

Step 1: Choose the type of projection model

• Determine the appropriate projection model based on your business needs and planning horizon.
• Consider the following factors when choosing a projection model:
• Short-term projections : Covering 3-12 months, these projections are suitable for immediate planning and monitoring.
• Long-term projections : Extending beyond 12 months, these projections provide insights for strategic decision-making and future planning.
• Combination approach : Use a combination of short-term and long-term projections to address both immediate and long-range goals.

Step 2: Gather historical data and sales information

• Collect relevant historical financial data, including cash inflows and outflows from previous periods.
• Analyze sales information, considering seasonality, customer payment patterns, and market trends.

Pro Tip: Finance teams often utilize accounting software to ingest a range of historical and transactional data. 

Step 3: Project cash inflows

• Estimate cash inflows based on sales forecasts, considering factors such as payment terms and collection periods.
• Utilize historical data and market insights to refine your projections.

Step 4: Estimate cash outflows

• Identify and categorize various cash outflow components, such as operating expenses, loan repayments, supplier payments, and taxes.
• Use historical data and expense forecasts to estimate the timing and amount of cash outflows.

Pro Tip: By referencing the cash flow statement, you can identify the sources of cash inflows and outflow s. 

Step 5: Calculate opening and closing balances

• Calculate the opening balance for each period, which represents the cash available at the beginning of the period.
• Opening Balance = Previous Closing Balance
• Calculate the closing balance by considering the opening balance, cash inflows, and cash outflows for the period.
• Closing Balance = Opening Balance + Cash Inflows – Cash Outflows

Step 6: Account for timing and payment terms

• Consider the timing of cash inflows and outflows to create a realistic cash flow timeline.
• Account for payment terms with customers and suppliers to align projections with cash movements.

Step 7: Calculate net cash flow

• Calculate the net cash flow for each period, which represents the difference between cash inflows and cash outflows.
• Net Cash Flow = Cash Inflows – Cash Outflows

Pro Tip: Calculating the net cash flow for each period is vital for your business, as it gives you a clear picture of your future cash position. Think of it as your future cash flow calculation.

Step 8: Build contingency plans

• Incorporate contingency plans to mitigate unexpected events impacting cash flow, such as economic downturns or late payments.
• Create buffers in your projections to handle unforeseen circumstances.

Step 9: Implement rolling forecasts

• Embrace a rolling forecast approach, where you regularly update and refine your cash flow projections based on actual performance and changing circumstances.
• Rolling forecasts provide a dynamic view of your cash flow, allowing for adjustments and increased accuracy.

Cash Flow Projection Example

Let’s take a sneak peek into the cash flow projection of Pizza Planet, a hypothetical firm. In March, they began with an opening balance of $50,000. This snapshot will show us how their finances evolved during the next 4 months.

Here are 5 key takeaways from the above cash flow projection analysis for Pizza Planet:

Upsurge in Cash Flow from Receivables Collection (April):

• Successful efforts at collecting outstanding customer payments result in a significant increase in cash flow.
• Indicates effective accounts receivable management and timely collection processes.

Buffer Cash Addition (May and June):

• The company proactively adds buffer cash to prepare for potential financial disruptions.
• Demonstrates a prudent approach to financial planning and readiness for unexpected challenges.

Spike in Cash Outflow from Loan Payment (May):

• A noticeable cash outflow increase is attributed to the repayment of borrowed funds.
• It suggests a commitment to honoring loan obligations and maintaining a healthy financial standing.

Manageable Negative Net Cash Flow (May and June):

• A negative net cash flow during these months is offset by a positive net cash flow in other months.
• Indicates the ability to handle short-term cash fluctuations and maintain overall financial stability.

Consistent Closing Balance Growth:

• The closing balance exhibits a consistent and upward trend over the projection period.
• Reflects effective cash flow management, where inflows cover outflows and support the growth of the closing cash position.

Overall, the cash flow projection portrays a healthy cash flow for Pizza Planet, highlighting their ability to collect receivables, plan for contingencies, manage loan obligations, have resilience in managing short-term fluctuations, and steadily improve their cash position over time.

How to Calculate Projected Cash Flow?

To calculate projected cash flow, start by estimating incoming cash from sources like sales, investments, and financing. Then, deduct anticipated cash outflows such as operating expenses, loan payments, taxes, and capital expenditures. The resulting net cash flow clearly shows how much cash the business expects to generate or use within the forecasted period. 

Calculating projected cash flow is a crucial process for businesses to anticipate their future financial health and make informed decisions. This process involves forecasting expected cash inflows and outflows over a specific period using historical data, sales forecasts, expense projections, and other relevant information. Regularly updating and reviewing projected cash flow helps businesses identify potential cash shortages or surpluses, allowing for proactive cash management strategies and financial planning. 

Download our cash flow calculator to effortlessly track your company’s operating cash flow,

net cash flow (in/out), projected cash flow, and closing balance.

6 Common Pitfalls to Avoid When Creating Cash Flow Projections

At HighRadius, we recently turned our research engine toward cash flow forecasting to shed light on the sources of projection failures. One of our significant findings was that most companies opt for unrealistic projection models that don’t mirror the actual workings of their finance department.

Cash flow projections are only as strong as the numbers behind them. No one can be completely certain months in advance if they will encounter any unexpected events. Defining a realistic cash flow projection for your company is crucial to achieving more accurate results. Don’t let optimism cloud your key assumptions. Stick to the most likely numbers for your projections.

A 5% variance is acceptable, but exceeding this threshold warrants a closer look at your key assumptions. Identify any logical flaws that may compromise accuracy. Take note of these pitfall insights we’ve gathered from finance executives who have shared their experiences:

• Avoid overly generous sales forecasts that can undermine projection accuracy.
• Maintain a realistic approach to sales projections to ensure reliable cash flow projections.

Accounts Receivable: 

• Reflect the payment behaviour of your customers accurately in projections, especially if they tend to pay on the last possible day despite a 30-day payment schedule.
• Adjust the projection cycle to align with the actual payment patterns.
• Factor in annual and quarterly bills on the payables side of your projections.
• Consider potential changes in tax rates if your business is expected to reach a new tax level.
• Account for seasonal fluctuations and cyclical trends specific to your industry.
• Analyze historical data to identify patterns and adjust projections accordingly to reflect these variations.
• Incorporate contingencies in your projections to prepare for unforeseen circumstances such as economic downturns, natural disasters, or changes in market conditions.
• Build buffers to mitigate the impact of unexpected events on your cash flow.
• Failing to create multiple scenarios can leave you unprepared for different business outcomes.
• Develop projections for best-case, worst-case, and moderate scenarios to assess the impact of various circumstances on cash flow.

By addressing these pitfalls and adopting these best practices shared by finance executives, you can create more reliable and effective cash flow projections for your business. Stay proactive and keep your projections aligned with the realities of your industry and market conditions.

How Automation Helps in Projecting Cash Flow?

Building a cash flow projection chart is just the first step; the real power lies in the insights it can provide. Cash flow projection is crucial, but let’s face it – the traditional process is resource-consuming and hampers productivity. 

However, there’s a solution: a cash flow projection chart automation tool. 

Professionals in treasury understand this need for automation, but it requires an investment of time and money. Building a compelling business case is straightforward, especially for companies prioritizing cash reporting, forecasting, and leveraging the output for day-to-day cash management and investment planning.

Consider the following 3 business use cases shared by finance executives, highlighting the benefits of automated cash flow projections that far outweigh the initial investment:

Scalability and adaptability:

Forecasting cash flow in spreadsheets is manageable in the early stages, but as your business grows, it becomes challenging and resource-intensive. Manual cash flow management struggles to keep up with the increasing transactions and customer portfolios.

Many businesses rely on one-off solutions that only temporarily patch up cash flow processes without considering the implications for the future. Your business needs an automation tool that can effortlessly scale with your business, accommodating evolving needs.

Moreover, by opting for customization options, you can tailor the cash flow projections to your specific business requirements and adapt to changing market dynamics.

Time savings:

Consider a simple example of the time and effort involved in compiling a 13-week cash flow projection for stakeholders every week. The process typically includes:

• Capture cash flow data from banking and accounting platforms and classify transactions.
• Create short-term forecasts using payables and receivables data.
• Model budgets and other business plans for medium-term forecasts.
• Collect data from various business units, subsidiaries, and inventory levels.
• Consolidate the data into a single cash flow projection.
• Perform variance and sensitivity analysis.
• Compile reporting with commentary.

This process alone can consume many hours each week. Let’s assume it takes six hours for a single resource and another six hours for other contributors, totalling 12 hours per week or 624 hours per year. 

By implementing a cash flow projection automation tool, you can say goodbye to tedious manual tasks such as logging in, downloading data, updating spreadsheets, and compiling reports. Automating these processes saves your team countless hours, allowing them to focus on strategic initiatives and high-value activities.

Imagine the added time spent on data conversations, information requests, and follow-ups. Cash reporting can quickly become an ongoing, never-ending process.

By implementing a cash flow projection automation tool, you can say goodbye to tedious manual tasks such as logging in, downloading data, manipulating spreadsheets, and compiling reports. Automating these processes saves your team countless hours, allowing them to focus on strategic initiatives and high-value activities.

Accuracy and efficiency:

When it comes to cash flow monitoring and projection, accuracy is paramount for effective risk management. However, manual data handling introduces the risk of human error, which can have significant financial implications for businesses. These challenges are:

• Inaccurate financial decision-making
• Cash flow uncertainty
• Increased financial risks
• Impaired stakeholder confidence
• Wasted resources and time
• Compliance and reporting challenges
• Inconsistent data processing

Automating cash flow projections mitigates these risks by ensuring accurate and reliable results. An automation tool’s consistent data processing, real-time integration, error detection, and data validation capabilities instill greater accuracy, reliability, and confidence in the projected cash flow figures.

For example, Harris, a leading national mechanical contractor, transformed their cash flow management by adopting an automation tool. They achieved up to 85% accuracy across forecasts for 900+ projects and gained multiple 360-view projection horizons, from 1 day to 6 months, updated daily. This improvement in accuracy allowed the team to focus on higher-value tasks, driving better outcomes.

Cash Flow Projections with HighRadius

Managing cash flow projections today requires a host of tools to track data, usage, and historic revenue trends as seen above. Teams rely on spreadsheets, data warehouses, business intelligence tools, and analysts to compile and report the data.

Discover the power of HighRadius cash flow forecasting software , designed to precisely capture and analyze diverse scenarios, seamlessly integrating them into your cash forecasts. By visualizing the impact of these scenarios on your cash flows in real time, you gain a comprehensive understanding of potential outcomes and can proactively respond to changing circumstances.

Here’s how AI takes variance analysis to the next level and helps you generate accurate cash flow forecasts with low variance. It automates the collection of data on past cash flows, including bank statements, accounts receivable, accounts payable, and other financial transactions, and integrates with most financial systems. This data is analyzed to detect patterns and trends that can be used to anticipate future cash flows. Based on this historical analysis and regression analysis of complex cash flow categories such as A/R and A/P, AI selects an algorithm that can provide an accurate cash forecast.

When your forecast is off, you can miss opportunities to invest in growth or undermine your credibility and investor confidence. An accurate forecast means predictable growth and increased shareholder confidence. 

1. How do you prepare a projected cash flow statement?

Steps to prepare a projected cash flow statement:

• Analyze historical cash flows.
• Estimate future sales and collections from customers.
• Forecast expected payments to suppliers and vendors.
• Consider changes in operating, investing, and financing activities.
• Compile all these estimates into a projected cash flow statement for the desired period.

2. What is a projected cash flow budget?

A projected cash flow budget is a financial statement that estimates the amount of cash your business is expected to receive and pay out over a specific time period. This information can help your business have enough cash flow to maintain its regular operations during the given period.

3. What is a 3-year projected cash flow statement?

A 3-year projected cash flow statement forecasts cash inflows and outflows for the next three years. It helps businesses assess their expected cash position and plan for future financial needs and opportunities.

4. What are projected cash flow and fund flow statements?

A projected cash flow statement forecasts cash inflows and outflows over a period, aiding in budgeting and planning. The fund flow statement tracks the movement of funds between sources and uses, analyzing the financial position. Both provide insights into a company’s liquidity and financial health.

5. What are the four key uses of a cash flow forecast?

• Evaluate cash availability for operational expenses and investments.
• Identify potential cash flow gaps or surpluses.
• Support financial planning, budgeting, and decision-making.
• Assist in securing financing or negotiating favorable terms with stakeholders.

6. What is the cash flow projection ratio?

The term cash flow projection ratio is not a commonly used financial ratio. However, various ratios like operating cash flow ratio, cash flow margin, and cash flow coverage ratio are used to assess a company’s cash flow generation and management capabilities.

7. What is the formula for projected cash flow?

The projected cash flow formula is Projected Cash Flow = Projected Cash Inflows – Projected Cash Outflows . It calculates the anticipated net cash flow by subtracting projected expenses from projected revenues, considering all sources of inflows and outflows.

8. What are the advantages of cash flow projection?

Cash flow projection helps businesses:

• Anticipate future financial needs
• Manage cash shortages effectively
• Make informed decisions
• Ensure stability and growth
• Provide a roadmap for financial planning
• Stay proactive in managing finances

Related Resources

5 Ways To Improve Small Business Cash Flow Management

The Business Case for Automating Cash Forecasting

What Is a Consignment Agreement And How Does It Work?

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Cash Flow Forecasting: A How-To Guide (With Templates)

Janet Berry-Johnson, CPA

Reviewed by

May 30, 2023

This article is Tax Professional approved

Most small business owners just want their accounting done so they can focus on doing what they love. But tracking and forecasting cash flow—despite the time and effort required—is essential for starting, operating, and expanding a business.

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In 2018, CB Insights analyzed 101 failed startups and found that running out of cash was the second most common cause of failure, impacting 29% of businesses.

To avoid that fate, you need a cash flow forecast to help you estimate how much your cash outflows and inflows will affect your business.

What is a cash flow forecast?

A cash flow forecast (also known as a cash flow projection) is like a budget, but rather than estimating revenues and expenses, it estimates cash coming in and going out based on past business performance.

It’s not uncommon for a business to experience a cash shortage, even when sales are good. This usually happens when customers are allowed to pay after the product or service is delivered. In cases like these, a business owner must plan how they will cover costs before receiving the payment.

For example, say Hana Enterprises ships $50,000 worth of security products to customers in January, along with invoices that are due in 30 days. The company will have $50,000 of revenues for the month but won’t receive any cash until February. On paper, the business looks healthy, but all of its sales are tied up in the accounts receivable. Unless Hana Enterprises has plenty of cash on hand at the beginning of the month, they will have trouble covering their expenditures until they start receiving cash from clients.

With a cash flow forecast, you ignore sales on credit, accounts payable, and accrued expenses, instead focusing on the revenue you actually expect to collect and the expenses you actually expect to pay during a given period. You can also use the information provided on past cash flow statements to estimate your expenses for the period you’re forecasting for.

( If you just want to dive into cash flow forecasting, check out our free cash flow forecast template . )

The benefits of cash forecasting

Cash forecasting may sound like something boring that accountants do in big companies. Not so! It’s absolutely essential for every single business. Here’s why:

• It helps you identify potential problems. Cash forecasting can help you predict the months in which you’re likely to experience a cash deficit and make necessary changes, like changing your pricing or adjusting your business plan.
• It decreases the impact of cash shortages. When you can predict months in which you might experience a cash shortage, you can take steps to plan for them. You might save more in months where you have a surplus, step up your receivables collection efforts, or establish a line of credit with your bank to guarantee enough working capital to last the period.
• It keeps suppliers and employees happy. Late payments and missing paychecks damage your reputation with suppliers and employees. When you can predict how much money you’ll have on hand in any given month, you can confirm that you’ll be able to meet your payroll obligations and pay suppliers by the due date.

Free cash flow forecast template

To make this a lot easier, we’ve created a business cash flow forecast template for Excel that you can start using right now.

Access Template

The template has three essential pieces:

• Beginning cash balance. This is the actual cash you expect to have on hand at the beginning of the month. It should include bank accounts, PayPal, Venmo, anything you use that’s currently holding just business funds. This information can be found on your balance sheet .
• Sources of cash. These are all of your cash inflows each month. It can include cash sales, receivables collections, repayments from money you’ve loaned out, etc.
• Uses of cash. This is every expense your business may incur, including payroll, payments to vendors, utilities, rent, loan payments, etc.

Here’s an example of a completed cash flow projection for a three month period:

Hana Enterprises, Inc.

Cash Flow Projection

January to March 2022

As you can see from the example above, Hana Enterprises expects to have a cash shortage in March. This results from a negative net cash flow (when more cash goes out than comes in). Knowing that information ahead of time, the company can take steps to prevent the shortage from occurring.

Hana Enterprises has several options to avoid this shortage in March. They might secure a line of credit from the bank, purchase fewer computers in February, negotiate longer payment terms from vendors, contact late-paying customers to speed up the collection of receivables, or take other cost-cutting measures to reduce their overhead expenses.

When you’re ready to get started, download your copy of the cash flow forecasting sheet here .

How Bench can help

Use Bench’s simple, intuitive platform to get all the information you need to project your cash flow. Each month, your transactions are automatically imported into our platform then categorized and reviewed by your bookkeeper. Bench helps you stay on top of your business’s top expenses so you can make informed budgeting decisions on the fly. Explore our platform with a free demo .

Tips for improving your cash flow spreadsheet

Keep in mind: a cash flow forecast isn’t something you create once a year and never look at again. It’s a living, breathing business tool you should review and update on a monthly basis.

Though projections are helpful, they can’t perfectly predict the future. As the months pass, you should expect to see that your projections aren’t quite matching up with your actual results. That means it’s time to re-run your forecast to take into account these differences.

To improve the accuracy of your cash flow worksheet, consider the following:

• Account for extra pay periods. If you pay employees bi-weekly, make sure your projection takes into account any months with three payrolls.
• Remember annual payments. If certain insurance policies, subscriptions, or other expenses are paid annually rather than monthly, be sure to include them in your spreadsheet.
• Remember estimated tax payments. For most calendar-year businesses, estimated tax payments are due on April 15th, June 15th, September 15th, and January 15th.
• Don’t forget about savings. Try to allocate a portion of any cash surpluses to save for lean months.
• Identify seasonal fluctuations. If you’re expecting a period of time with lower sales, make sure your forecast reflects this so you can have enough cash on hand to ramp up when business picks up again.
• Don’t forecast too far out. Creating a rolling 12-month cash flow forecast that you update at the end of each month can help you identify issues before your business faces financial troubles, but don’t try to forecast more than 12 months out. The longer the reporting period you want to forecast, the more likely you’ll end up spending a lot of time creating a cash flow projection that doesn’t provide any useful information.

Your cash flow forecast is key to good cash flow management . Try to account for all cash sources and uses in your projection and maintain an emergency fund or backup plan to ensure you don’t get sidelined by slow-paying customers or unexpected expenses. When you do, this simple but valuable tool can help you keep an eye on cash and ensure you don’t compromise growth or put your business in jeopardy.

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Set up a cash flow statement

A cash flow statement can be one of the most important tools in managing your finances. Use our cash flow statement template to help plan your business payments.

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Why you need a cash flow statement

Create your cash flow statement, completing your cash flow statement.

A cash flow statement tracks all the money flowing in and out of your business. You can use your cash flow statement to:

• find payment cycles and seasonal trends
• forecast your future business finances
• help predict shortages and surpluses
• plan ahead to make sure you always have money to cover payments.

Cash flow forecasting

A cash flow forecast is an estimate of your future sales and expenses. It is a useful tool to help you understand if you will have enough income to cover your expenses. This will help you prevent cash shortages and avoid debt.

You can use the cash flow statement template to create a cash flow forecast by entering your estimated figures for each future period.

Download our template to create your current or forecasted cash flow statement.

Cash flow statement template

For each year, you'll need to fill in actual or estimated figures against each of the below items. If you use estimated costs, you’ll need to label and justify them clearly.

You'll also need to clearly state on your cash flow statement whether your figures are GST inclusive or exclusive.

Opening balance

Cash incoming.

Cash incoming is money that is flowing into the business. If you are forecasting estimated figures, consider what forms of income your business may have and when. You can anticipate cash incoming by looking at previous years, identifying seasonal trends and accounting for regular sources of income. Cash incoming can include:

• debtor receipts
• tax rebates.

Total incoming

Calculate the total incoming by adding all cash incoming items.

Cash outgoing

Cash outgoing is any payments that your company makes. If you are forecasting estimated figures, consider what expenses will be required to operate your business and when they need to be paid. You can anticipate cash outgoing by looking at previous years, identifying seasonal trends and accounting for your major expenses. Cash outgoing can include:

• accountant fees
• advertising and marketing
• rent and rates

Total outgoing

Calculate the total outgoing by adding all cash outgoing items.

Monthly cash balance

Calculate the monthly cash balance by subtracting the total outgoing cash from the total incoming cash.

Closing balance

Calculate the closing balance by adding the opening balance and total incoming, then minus total outgoing.

Find financial terms in our glossary.

Check our information on how to organise your finances., was this page helpful, thanks for sharing your feedback with us..

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How to Read & Understand a Cash Flow Statement

• 30 Apr 2020

Whether you’re a working professional, business owner, entrepreneur, or investor, knowing how to read and understand a cash flow statement can enable you to extract important data about the financial health of a company.

If you’re an investor, this information can help you better understand whether you should invest in a company. If you’re a business owner or entrepreneur, it can help you understand business performance and adjust key initiatives or strategies. If you’re a manager, it can help you more effectively manage budgets , oversee your team, and develop closer relationships with leadership—ultimately allowing you to play a larger role within your organization.

Not everyone has finance or accounting expertise. For non-finance professionals , understanding the concepts behind a cash flow statement and other financial documents can be challenging.

To facilitate this understanding, here’s everything you need to know about how to read and understand a cash flow statement.

Access your free e-book today.

What is a Cash Flow Statement?

The purpose of a cash flow statement is to provide a detailed picture of what happened to a business’s cash during a specified period, known as the accounting period. It demonstrates an organization’s ability to operate in the short and long term, based on how much cash is flowing into and out of the business.

The cash flow statement is typically broken into three sections:

• Operating activities
• Investing activities
• Financing activities

Operating activities detail cash flow that’s generated once the company delivers its regular goods or services, and includes both revenue and expenses. Investing activities include cash flow from purchasing or selling assets—think physical property, such as real estate or vehicles, and non-physical property, like patents—using free cash, not debt. Financing activities detail cash flow from both debt and equity financing.

Based on the cash flow statement, you can see how much cash different types of activities generate, then make business decisions based on your analysis of financial statements .

Ideally, a company’s cash from operating income should routinely exceed its net income, because a positive cash flow speaks to a company’s ability to remain solvent and grow its operations.

It’s important to note that cash flow is different from profit , which is why a cash flow statement is often interpreted together with other financial documents, such as a balance sheet and income statement.

How Cash Flow Is Calculated

Now that you understand what comprises a cash flow statement and why it’s important for financial analysis, here’s a look at two common methods used to calculate and prepare the operating activities section of cash flow statements.

Cash Flow Statement Direct Method

The first method used to calculate the operation section is called the direct method , which is based on the transactional information that impacted cash during the period. To calculate the operation section using the direct method, take all cash collections from operating activities, and subtract all of the cash disbursements from the operating activities.

Cash Flow Statement Indirect Method

The second way to prepare the operating section of the statement of cash flows is called the indirect method . This method depends on the accrual accounting method in which the accountant records revenues and expenses at times other than when cash was paid or received—meaning that these accrual entries and adjustments cause the cash flow from operating activities to differ from net income.

Instead of organizing transactional data like the direct method, the accountant starts with the net income number found from the income statement and makes adjustments to undo the impact of the accruals that were made during the period.

Essentially, the accountant will convert net income to actual cash flow by de-accruing it through a process of identifying any non-cash expenses for the period from the income statement. The most common and consistent of these are depreciation , the reduction in the value of an asset over time, and amortization , the spreading of payments over multiple periods.

Related: Financial Terminology: 20 Financial Terms to Know

How to Interpret a Cash Flow Statement

Whenever you review any financial statement, you should consider it from a business perspective. Financial documents are designed to provide insight into the financial health and status of an organization.

For example, cash flow statements can reveal what phase a business is in: whether it’s a rapidly growing startup or a mature and profitable company. It can also reveal whether a company is going through transition or in a state of decline.

Using this information, an investor might decide that a company with uneven cash flow is too risky to invest in; or they might decide that a company with positive cash flow is primed for growth. Similarly, a department head might look at a cash flow statement to understand how their particular department is contributing to the health and wellbeing of the company and use that insight to adjust their department’s activities. Cash flow might also impact internal decisions, such as budgeting, or the decision to hire (or fire) employees.

Cash flow is typically depicted as being positive (the business is taking in more cash than it’s expending) or negative (the business is spending more cash than it’s receiving).

Related: How Learning About Finance Can Jumpstart Your Career No Matter Your Industry

Positive Cash Flow

Positive cash flow indicates that a company has more money flowing into the business than out of it over a specified period. This is an ideal situation to be in because having an excess of cash allows the company to reinvest in itself and its shareholders, settle debt payments, and find new ways to grow the business.

Positive cash flow does not necessarily translate to profit, however. Your business can be profitable without being cash flow-positive, and you can have positive cash flow without actually making a profit.

Negative Cash Flow

Having negative cash flow means your cash outflow is higher than your cash inflow during a period, but it doesn’t necessarily mean profit is lost. Instead, negative cash flow may be caused by expenditure and income mismatch, which should be addressed as soon as possible.

Negative cash flow may also be caused by a company’s decision to expand the business and invest in future growth, so it’s important to analyze changes in cash flow from one period to another, which can indicate how a company is performing overall.

Cash Flow Statement Example

Here's an example of a cash flow statement generated by a fictional company, which shows the kind of information typically included and how it's organized.

Go to the alternative version .

This cash flow statement shows Company A started the year with approximately $10.75 billion in cash and equivalents.

Cash flow is broken out into cash flow from operating activities, investing activities, and financing activities. The business brought in $53.66 billion through its regular operating activities. Meanwhile, it spent approximately $33.77 billion in investment activities, and a further $16.3 billion in financing activities, for a total cash outflow of $50.1 billion.

The result is the business ended the year with a positive cash flow of $3.5 billion, and total cash of $14.26 billion.

The Importance of Cash Flow

Cash flow statements are one of the most critical financial documents that an organization prepares, offering valuable insight into the health of the business. By learning how to read a cash flow statement and other financial documents, you can acquire the financial accounting skills needed to make smarter business and investment decisions, regardless of your position.

Are you interested in gaining a toolkit for making smart financial decisions and the confidence to clearly communicate those decisions to key internal and external stakeholders? Explore our online finance and accounting courses and download our free course flowchart to determine which best aligns with your goals.

Data Tables

Company a - statement of cash flows (alternative version).

Year Ended September 28, 2019 (In millions)

Cash and cash equivalents, beginning of the year: $10,746

OPERATING ACTIVITIES

INVESTING ACTIVITIES

FINANCING ACTIVITIES

Increase / Decrease in Cash and Cash Equivalents: 3,513

Cash and Cash Equivalents, End of Year: $14,259

Go back to the article .

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• Cashflow management

How to create a cashflow plan and why it's so important

A cash flow plan helps those responsible to make optimal decisions because it shows how the cash situation will develop in the coming months . Here we show you how to create and work with a cash flow plan.

Cash flow plan: Definition

A cash flow plan shows the current and future cash position of a company. It shows the expected cash flows on a monthly, weekly or even daily basis. The cash flows represent all income and expenses of the company that are related to its operating activities.

To create a cash flow plan, you need to have insight into all the business accounts of a company where transactions take place. Each transaction is a cash flow, where an outgoing cash flow is an expense and an incoming cash flow is a revenue.

By subtracting these expenses from the income each month, week or day, you get the expected cash balance, which can be either positive or negative, i.e. a surplus or a deficit.

If the cash balance is regularly negative, a cash shortage occurs, which in the worst case leads to insolvency. The cash flow plan helps to identify cash shortages at an early stage so that you have enough time to act.

Cash flow plan in 3 steps

Revenue & expenses from the last 6 months up to now.

If you have never prepared a cash flow plan before, we recommend that you first get an overview of your past cash situation. This will help you later to make better estimates for your expected income and expenses.

Go through all your bank statements from the last six months and divide the different income and expenses into categories, for example:

• Revenue from sales
• Income from financial investments
• Tax refunds
• Revenue from licences
• Other revenues
• Salary payments and wages
• Expenses for marketing
• General expenses (electricity, bin collection, etc.)
• Fees for software subscriptions and licenses
• Investments
• Tax payments

For each month, add up the individual transactions in each category, e.g. all salary payments to your employees in the category "Salary payments and wages". You then enter the result for the respective month in a table.

Proceed in this way for each category so that at the end you have an overview of the past six months.

Calculate the cash balance for each month

Then deduct the expenses from the revenues in each month:

• Balance per month = Total revenue in month - total expenses in month
• You offset the result against the cash balance of the previous month and then get the total cash balance, which shows you how much cash you have available in total for the respective month:
• Total cash balance = Cash balance from previous month + cash balance from current month

Anticipate future cash flows

Once you have calculated the cash balance for the past six months, take a closer look at the values in the individual categories: In some cases, you will find that the expenses are the same or vary only slightly from month to month, e.g. salary payments and fees for software subscriptions.

You now enter these recurring expenses in your table for the coming months, because you can assume that they will remain the same. For all other categories where the values fluctuate strongly, you derive estimated values.

For the expected revenues, take into account how customer demand will develop. If you assume that this will increase, enter a larger value for revenue from sales in the coming months.

Once you have entered your expected values for all categories in the table, calculate the expected cash balance and the total cash balance. You will then see how much cash you will have available in the coming months. The more you know about your business and its development, the more accurate estimates you can make and the more accurate your cash flow plan will be.

Cash flow plan Example

The following table shows two months of how cash flow planning works in principle:

Cash flow plan template

You can easily create such a table in Excel or download our free cash flow plan template here. You can adapt the table according to your needs, as there may be many more categories in your company.

It is important that you record all your revenues and expenses in the cash flow planning, because this is the only way to get an accurate overview of your current and future cash situation. How to work with a cash flow plan

Once you have completed the table and calculated the total cash balance for the coming months, you can see exactly how much cash you are likely to have available.

For example, if you assume that income will fall, you can see whether your cash will be sufficient to cover running costs or whether a cash shortage will arise. If you recognise such situations at an early stage, you can take measures beforehand so that the cash shortage does not arise in the first place.

On the other hand, you can also see how much cash you will have available for investments. With the help of the cash flow plan, you can estimate favourable times when making an investment will put the least strain on your liquidity. Your cash flow plan therefore helps you to optimally manage your operative business.

Digital tools to create a cash flow plan

You have probably noticed that creating a cash flow plan is very time-consuming because you first have to collect all income and expenses, enter them into categories and then offset them against each other. Errors can easily occur and distort the result.

With the help of a digital cash flow management tool, this process becomes easier. For example, Agicap's software automatically connects to all your business accounts and retrieves the transactions from there every day.

Recurring deposits and withdrawals are also automatically sorted into a category you define. The tool then also updates your cash flow plan based on the current transactions, so you have an up-to-date cash flow every day.

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6 Ways to Manage Cash Flow for Your Business

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Every business needs cash. Regardless of how much revenue your business earns, if your cash is tied up in unsold inventory or receivables, that money doesn’t do you any good. Maintaining a healthy business cash flow gives you the capacity to meet your financial obligations and the flexibility to grow with new opportunities. You’ll have enough cash on hand to pay the bills, say “yes” to a new project or launch a marketing campaign.

Cash flow is the money coming into and going out of your business, tracked on a cash-flow statement. If you have positive cash flow, you have more money coming into your business – typically through sales or borrowed funds – than going out, to expenses such as payroll, inventory and rent.

But maintaining positive business cash flow isn’t easy; many entrepreneurs struggle with it, according to research by the Federal Reserve Banks of New York, Atlanta, Cleveland and Philadelphia. In some situations, a cash-flow loan may be the solution to a cash crisis, but that’s not always the case.

Below we outline six strategies for managing business cash flow.

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1. Learn your cash-flow cycle

A cash-flow cycle is the time it takes to purchase raw materials, turn them into product, sell the product and collect payment. Philip Campbell, a certified public accountant and author of the book “Never Run Out of Cash,” says that to understand your cash-flow cycle, you should be able to answer two questions at any given time:

What happened to your business's cash last month?

What’s about to happen to your business’s cash?

You’ll learn the answers to these questions by keeping your business’s balance sheet and profit and loss statements up to date and reviewing them regularly. Once you understand your cash-flow cycle, Campbell says, you can work to correct any inconsistencies in it — for example, by paying your suppliers later or collecting payments earlier.

2. Urge your customers to pay on time

The average debtor pays two weeks late, according to accounting platform Xero. So instead of waiting around to receive payments from your customers, Campbell says, “be proactive about getting paid.”

Develop a system to remind customers to pay on time, such as setting up automatic emails to remind customers 10, seven and two days before a payment is due. If you don’t receive a payment on time, don’t be afraid to follow up with a more personal note or a phone call.

3. Turn your inventory quickly

From a small-business owner’s perspective, inventory is basically the same as cash, says Will Katz, director of the Small Business Development Center at the University of Kansas. To maximize the cash your business has at any given time, turn your inventory more quickly, Katz says.

For example, say a shoe store owner spends $500,000 buying shoes every year. If she makes two large shoe purchases each year, worth $250,000 each, she’ll have that amount tied up in inventory until those shoes sell. That leaves less cash available to meet financial obligations or reinvest in the business. But if she does five inventory turns a year, she will only have $100,000 in cash tied up in inventory at a given time, freeing up more cash.

4. Negotiate with your vendors and customers

Negotiation can be a powerful tool when it comes to maintaining healthy business cash flow. You can negotiate both your accounts receivable with customers and your accounts payable with vendors. For example, if a customer purchases a large order and suggests a 30- or 60-day payment term (common with large companies), ask if you can be paid sooner.

“You’ll never get it if you don’t ask,” Katz says.

On the flip side, say you purchase raw materials from a supplier, but it’ll be weeks until you turn those materials into a saleable product. Ask your vendor if you can pay for the materials several days or even weeks after you receive them. If you have a good track record of paying your vendors on time, they’ll be more likely to agree to such an arrangement.

5. Consider invoice financing.

If you’re unable to negotiate or need cash even sooner than the time you’re able to agree upon with your customers, consider invoice financing , also known as accounts receivable financing.

Slightly different from invoice factoring , which buys invoices at a discount, invoice financing companies will advance the total amount or a portion of your outstanding invoices, and you’ll repay that amount plus interest after you receive the invoice. Annual percentage rates for invoice financing products range from about 11% plus the prime rate to 64%.

6. Compare cash-flow loans

If you don’t have outstanding accounts receivable but want additional financing to increase your cash flow, cash-flow loans could be an option. Cash-flow loans are short-term, often high-interest loans or lines of credit offered by online lenders. You shouldn’t rely on cash-flow loans for typical expenses such as rent and payroll. Reserve them for expenses that will ultimately increase your business’s revenue, such as a marketing campaign or a new piece of equipment.

But before you apply for a cash-flow loan, a working capital loan or any small-business loan, for that matter, compare your options based on factors including terms, APR and what you qualify for.

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On a similar note...

Creating a cash flow projection

In less than an hour a month, you can identify potential cash shortfalls — and surpluses — in your business’s future.

Even businesses with healthy growth and strong sales run the risk of owing more than they can pay in a given month. Fortunately, spending less than an hour each month on a cash flow projection can help you identify potential cash shortfalls in the months ahead.

Before you create a cash flow projection for your business, it’s important to identify your key assumptions about how cash flows in and out of your business each month.

Identifying some key assumptions

For your cash flow projection, make assumptions in two key areas:

• Receivables: These assumptions should outline how quickly you receive payment from your customers. For example, if most of your customers pay you within 30 days, a key assumption could be: 90% of sales will be collected the month after the sale.
• Payables: These assumptions should outline when your payments are due. For example, if your vendors require payment within 2 weeks of delivery, a key assumption could be: Payables are due within 14 days of purchase.

Drafting your cash flow projection

With these realistic assumptions in hand, you can begin drafting your cash flow projection. To get started, create 12 columns across the top of a spreadsheet, representing the next 12 months. Then, in another column on the left-hand side, list the following cash flow categories and enter the appropriate amount in each column for each month (see descriptions below):

• Operating cash, beginning: The amount of money you’ll have at the beginning of each month.
• Sources of cash: All money coming in each month (receivable collections or direct sales, loans, etc.).
• Total sources of cash: Add the amounts in the “Operating cash, beginning” row to the amount in the “Sources of cash” for each month.
• Uses of cash: List every likely expense your business may incur, such as payroll, accounts payable to vendors, rent and loan payments, etc.
• Total uses of cash: Tally all your expenses so you can see exactly what will be going out the door each month.
• Excess (deficit) of cash: This is the number that counts. If you see positive numbers across the board, congratulations! You may have some extra dollars to invest back into your business. If you see a negative number for one of the months, don’t panic: You have time and options to prepare your business.

Sample cash flow projections

Here is an example of a cash flow projection that has been abbreviated to 4 months for the sake of simplicity:

XYZ Company, LLC Internal Cash Flow Projections August to November

Operating cash, beginning

Sources of cash

Uses of cash

*The company is projecting negative cash in November. What can you do today to prevent the negative cash flow?

Key assumptions :

• 75% of sales will be collected the month after the sale.
• 25% of sales will be collected the 2nd month after the sale.
• Payables are due in 25 days.
• 60% of eligible receivables can be used for the revolving line of credit.

Strategies to improve accuracy

As the months pass and you compare your monthly cash flow statements to your projections for each month, the numbers should match up. A 5% variance one way or the other can be okay, but if it starts being more than 5%, you should revisit your key assumptions to check for flaws in your logic. Even if your actual numbers come in higher than your projections, you should take a close look at your assumptions, because higher returns in the short term could lead to shortfalls later on. Keep in mind that lenders often use your cash flow and liquidity ratio to assess a company’s financial health.

To make sure your projection stays accurate throughout the year, be sure to consider these variable expenses.

• Months with three payrolls
• Months when insurance premiums are due
• Increased estimated taxes due to increased sales

Continue to refine your projection

To keep your cash flow projections on track, create a rolling 12-month plan that you update at the end of each month. If you add a new month to the end every time a month is completed, you’ll always have a long-term grasp of your business’s financial health.

However, don’t try to project more than 12 months into the future. It can be time consuming and variables can change. Prime rates could go up, for example.

Once you’ve gotten into the habit of using a cash flow projection, it should give you added control over your cash flow and a clearer picture of your company’s financial health. For additional support, make an appointment to talk to a banker.

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Preparing a cash flow forecast: Simple steps for vital insight

One of the questions we’re often asked by small business owners is, “how do I prepare a cash flow forecast?” It’s an important part of financial planning for any business. But, if you’re an entrepreneur or founder, you may not have an accounting or finance background.

It’s really simple to create your own forecast. And once you know how, it will become one of the most important pieces of insight into your business you have.

Why is a cash flow forecast important?

Cash flow planning is essential: you need cash in the bank to pay your bills. Staying on top of your cash flow will help you see if you’re going to run out of money - and when - so you can prepare ahead of time. Perhaps it will show you that you need to cut overheads, find new investment, or spend time generating sales.

On the flip side, you might be doing well, and you’re considering expanding into new markets, investing in new products, taking on bigger premises, or recruiting new staff. Having accurate cash flow projections will help you see if you can afford to take the plunge.

Four steps to a simple cash flow forecast

One option is to use free financial forecasting software online, which can help you plan ahead for the next week, 30 days, or six weeks. Or you can follow the four steps below to build your own cash flow forecast.

1. Decide how far out you want to plan for

Cash flow planning can cover anything from a few weeks to many months. Plan as far ahead as you can accurately predict. If you’re well-established, you might have a predictable sales pipeline and data from previous years. If you’re a new business, you might not have a huge amount of data - so the further out you go, the less accurate your predictions will be.

Don’t worry too much if you can’t plan far ahead. Your cash flow forecast can change over time. In fact, it should. As things change, or you get more exact estimates, you can update your plan.

2. List all your income

For each week or month in your cash flow forecast, list all the cash you’ve got coming in. Have one column for each week or month, and one row for each type of income.

Start with your sales, adding them to the appropriate week or month. You might be able to predict this from previous years’ figures, if you have them. Remember though, this is about when the cash is actually in your bank account. Put the figures in for when you know clients will pay invoices, or bank payments will clear.

Also remember to include all non-sales income, for example:

• Tax refunds
• Investment from shareholders or owners
• Royalties or licence fees

Add up the total for each column to get your net income.

3. List all your outgoings

Now you know what’s coming in, work out what you’ve got going out. For each week or month, make a list of all the money you’ll be spending, for example:

• Raw material
• Bank loans, fees and charges
• Marketing and advertising spend

Once you’ve listed everything you spend, add up the total for each column to get your net outgoings.

4. Work out your running cash flow

For each week or month column, take away your net outgoings from your net income. That will give you either a positive cash flow figure (you’ve got more cash coming in than you’re spending) or a negative cash flow figure (you’re spending more than you’ve got coming in).

You can then keep a running total, from week to week, or month to month, to get a picture of your cash flow forecast over time. Too many negative weeks might spell trouble, and you’ll need to do some forward-planning to make sure you can meet your commitments - e.g. paying salaries, loan payments, and rent. Equally a few positive months might signal that you’ve got money to expand or invest.

Jenni Chance

Senior Manager, Entrepreneurial & Private Business, PwC United Kingdom

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• Cash Flow Planning

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on March 29, 2023

Are You Retirement Ready?

Table of contents, what is cash flow planning.

Cash flow planning refers to the process of creating a detailed budget and holistic financial plan to manage income, expenses, and savings. It involves analyzing cash inflows and outflows , identifying areas of overspending, and creating a plan to improve financial stability .

The purpose of cash flow planning is to help individuals, families, and businesses to manage their finances effectively and achieve their financial goals.

Importance of Cash Flow Planning

Cash flow planning is crucial for individuals, families, and businesses for various reasons. These include:

Dealing With Unanticipated Costs

Cash flow planning is essential for dealing with unanticipated costs, such as medical bills, car repairs, and home repairs.

With a cash flow plan, individuals and businesses can set aside a portion of their income to cover these unexpected expenses without having to rely on credit or loans.

Identifying Potential Cost Savings

Cash flow planning helps individuals and businesses to identify potential cost savings by analyzing their expenses and identifying areas where they can cut back.

By reducing unnecessary expenses, individuals and businesses can save money and improve their financial stability.

Preparing for the Future

Cash flow planning helps individuals and businesses to prepare for the future by setting financial goals and creating a plan to achieve them.

Whether it is saving for a down payment on a house, planning for retirement, or building an emergency fund, a cash flow plan can help individuals and businesses to achieve their financial goals.

Maintaining Relationships with Suppliers for Businesses

Cash flow planning is crucial for maintaining relationships with suppliers for businesses.

By managing cash flow effectively, businesses can pay their suppliers on time, which helps to build trust and maintain good relationships.

Managing Risk to Minimize Losses

Cash flow planning is important for managing risk to minimize losses. By analyzing cash inflows and outflows, individuals and businesses can identify potential risks and create a plan to mitigate them.

For example, businesses can create a contingency plan for a sudden drop in revenue, while individuals can set aside money for unexpected expenses.

Cash Flow Planning for Individuals

Cash flow planning is crucial for individuals who want to manage their finances effectively and achieve their financial goals. Here are some strategies for creating a cash flow plan for individuals:

Utilize the 50-30-20 Rule

The 50-30-20 rule is a popular budgeting strategy that involves dividing the income of an individual into three categories: necessities, wants, and savings.

Under this rule, 50% of the income should be allocated to necessities like rent/ mortgage , groceries, transportation, and internet/cell phone.

The 30% should go towards wants, which may include entertainment, clothes, eating out, and other non-essential expenses. Finally, the remaining 20% should be set aside for savings.

If followed consistently, the 50-30-20 rule can be an effective way to reach financial goals . However, it is important to note that the distribution of these categories may vary based on location and cost of living.

In areas with a high cost of living, for example, a larger portion of the budget may need to be allocated toward housing.

Reduce Your Expenses

Once a budget has been created and expenses have been tracked, it becomes easier to identify areas where money can be saved.

A good starting point is to review monthly bills, such as streaming services, internet plans, and grocery expenses, and look for ways to reduce or eliminate unnecessary expenses. It may also be beneficial to compare prices and look for the best deals to save money.

Automate Your Savings

Many individuals tend to wait until the end of the month to save any money they have left over, but often find that there is nothing left to save. However, a better approach is to pay yourself first.

By setting up automatic withdrawals to transfer funds directly into a high-interest savings account, individuals can ensure they are saving money each month. This is particularly effective when timed with payday, as the money will not be missed from their paycheck.

Improving cash flow is a process that requires time and planning. Individuals should consider their long-term goals, such as saving for retirement and create a plan to achieve those goals.

While it may seem like a daunting task, every step taken will bring them closer to their ultimate financial objectives.

Cash Flow Planning for Businesses

Cash flow planning is essential for businesses, regardless of their size. Inefficient management of cash flow can lead to financial instability, debt accumulation, and the inability to pay bills or meet other financial obligations.

Therefore, businesses need to create a cash flow plan that takes into account all sources of income, expenses, and savings. Here are some tips and strategies for creating a cash flow plan for businesses.

Proactive Invoicing

Proactive invoicing is an essential strategy for businesses to manage their cash flow. It involves billing customers and clients in a timely manner and following up on overdue payments.

This can be achieved by setting up an automated invoicing system that sends reminders to customers about their outstanding balances. Furthermore, offering incentives for early payment can also help speed up the payment process.

Efficient Inventory Management

Efficient inventory management is critical to optimizing cash flow in businesses that sell products. Overstocking or understocking can lead to significant financial losses.

Therefore, businesses need to monitor inventory levels regularly and forecast future demand accurately. This can help ensure that they have the right amount of stock to meet customer demand while minimizing excess inventory.

Equipment Leasing

Leasing equipment instead of purchasing it outright can help businesses manage their cash flow. Equipment leasing enables businesses to use assets without having to pay for them upfront, which can help preserve cash reserves.

Additionally, leasing can also help businesses avoid the costs associated with equipment maintenance, repairs, and upgrades.

Borrowing Ahead

Borrowing ahead is a strategy that involves securing funding before a cash crunch occurs. This can help businesses prepare for unanticipated expenses, emergencies, or seasonal fluctuations in demand.

However, it is essential to carefully assess the terms and conditions of loans to ensure that the business can repay the debt without facing undue financial strain.

Business Operations Review

Reviewing business operations can help identify inefficiencies that drain cash reserves. Conducting a review of all business processes, systems, and practices can help businesses identify areas for improvement.

This can include renegotiating contracts with suppliers, optimizing staffing levels, and consolidating operations.

Payment and Collection Restructuring

Restructuring payment and collection processes can help businesses manage their cash flow more efficiently.

This can include offering discounts for early payments , negotiating extended payment terms with suppliers, and implementing electronic payment systems to speed up the collection process.

Money Monitoring

Monitoring cash flow is critical to managing business finances effectively. This involves regularly tracking income and expenses to identify potential problems early.

By monitoring cash flow, businesses can identify areas of overspending, reduce unnecessary costs, and improve overall financial performance.

Technology Utilization

Utilizing technology can help businesses manage their cash flow more effectively. Automated bookkeeping systems, expense-tracking software, and electronic payment systems can help streamline financial processes and reduce the risk of errors.

Additionally, cloud-based financial management tools can provide real-time visibility into cash flow, which can help businesses make informed financial decisions.

Loan Exploration

Exploring loan options can help businesses manage their cash flow during times of financial difficulty. However, it is essential to carefully evaluate the terms and conditions of loans to ensure that they align with the financial goals and capabilities of the business.

Businesses should also consider alternative financing options, such as lines of credit , factoring, or merchant cash advances.

Cash Flow Planning for Insurance

Cash flow planning is an essential process for insurance policyholders. It can help individuals manage their premiums and expenses related to insurance policies effectively.

Insurance policies , including life , health, auto, and home insurance, require regular payments, which can put a strain on the finances of an individual.

By creating a cash flow plan, individuals can ensure that they have sufficient funds available to meet payment deadlines for their premiums. This can prevent late fees or lapsed policies, which can lead to financial losses in case of an unexpected event.

To create a cash flow plan for insurance, individuals can start by analyzing their expenses and income. They should identify the insurance premiums and due dates and factor them into their monthly budget.

Additionally, they can explore ways to reduce their insurance costs, such as bundling policies, increasing deductibles, or shopping around for better rates.

Cash Flow Planning & Budgeting

Cash flow planning and budgeting are two closely related concepts.

Budgeting refers to the process of creating a financial plan that outlines the income and expenses of an individual or business over a specific period. The budget acts as a roadmap for managing cash flow, and cash flow planning helps to execute the plan effectively.

The main difference between cash flow planning and budgeting is the time frame.

Budgeting usually covers a more extended period, such as a year, while cash flow planning is more short-term, covering a few months to a year.

Cash flow planning focuses on managing cash inflows and outflows to ensure that there is enough cash available to meet the budgeted expenses.

By combining cash flow planning with budgeting, individuals and businesses can create a comprehensive financial plan that covers both short-term and long-term goals.

They can identify areas where they can save money and prioritize expenses accordingly to achieve their financial objectives.

Final Thoughts

Cash flow planning is an essential process that can help individuals and businesses manage their finances effectively.

By creating a detailed cash flow plan, they can ensure that they have sufficient funds available to cover their expenses and achieve their financial goals.

To create an effective cash flow plan, individuals and businesses need to analyze their income and expenses, identify areas of overspending, and explore ways to reduce costs. They should also prepare for unexpected expenses and create a buffer to absorb financial shocks.

If you are struggling to manage your cash flow or need help creating a comprehensive financial plan, consider seeking the services of a financial advisor.

Cash flow planning requires discipline and commitment, but the benefits of financial stability and security make it a worthwhile effort. Start planning for a better financial future by getting in touch with a financial advisor .

Cash Flow Planning FAQs

What is cash flow planning.

Cash flow planning is the process of creating a detailed budget and financial plan to manage income, expenses, and savings. It involves analyzing cash inflows and outflows, identifying areas of overspending, and creating a plan to improve financial stability.

Why is cash flow planning important?

Cash flow planning is essential because it helps individuals and businesses manage their finances effectively. By creating a detailed cash flow plan, they can ensure that they have sufficient funds available to cover their expenses and achieve their financial goals.

What are the factors you need to consider during cash flow planning?

Factors to consider during cash flow planning include analyzing income and expenses, identifying areas of overspending, preparing for unexpected expenses, creating a buffer, and exploring ways to reduce costs.

What are some tips for managing cash flow?

Tips for managing cash flow include creating a budget, analyzing expenses, reducing unnecessary costs, automating savings, preparing for unexpected expenses, and maintaining good relationships with suppliers.

What is the purpose of cash flow planning?

Cash flow planning is important for individuals and businesses to manage their finances effectively. Factors such as income and expenses, fixed and variable costs, cash inflows and outflows must be assessed to ensure overall financial health. Anticipating changes and creating contingency plans is crucial, as is considering long-term financial goals like retirement savings or investing in a new venture. Seeking the guidance of a financial advisor can help create a comprehensive cash flow plan.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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Introductory Guide to Business Cash Flow Planning

insightsoftware is the most comprehensive provider of solutions for the Office of the CFO. We turn information into insights, empowering business leaders to strategically drive their organization.

We all want better business cash flow and we want it yesterday. You can’t plan for emergencies, geopolitics, or sudden problems that you have no control over. But you can mitigate risks of business cash flow problems by having the right tools at your side. Business cash flow planning can get you out of a jam and save your company. Take a look at our ultimate guide to business cash flow planning highlighting:

• What is business cash flow planning?
• Why is business cash flow planning important?
• What are the three types of cash flows?
• What are some business cash flow planning terms I need to know?

What are the different types of business cash flow planning methods?

What is the future of business cash flow planning.

• How can I employ business cash flow planning at my company?

Who can help me with business cash flow planning?

What is business cash flow planning.

Business cash flow planning, also called cash flow management, occurs when you track how much money is coming in and out of your company at any given time.

The overall goal of business cash flow planning is to be able to predict how much money your company will have at some point in the future, so you can cover expenses and debts like payroll, purchase orders, rent/lease payments, and utilities.

How to Select Budgeting Software

Business cash flow indicates the changes in how much money your business has from one point to another. Cash flow planning keeps track of these figures, allows you to analyze them, and spot trends.

These trends are what you need to know for business cash flow planning, which gives you the ability to prepare ahead of time for any issues or problems.

For example, your business runs on a monthly invoicing method of receiving payments. At the beginning of the month, you record in your bank account that you have $175,000 cash on hand. You already know that you have regular monthly overhead that doesn’t change of about $95,500, including rent, software fees, payroll, and utilities.

You generally have purchase orders that come in from customers that total around $65,000. But this month was an increase of $15,000 more.

That will mean your cash flow, before the end of the following month, will be $500 in the red. That’s a good thing because you picked up $15,000 more in business. But you may have to juggle things or try to get some of those orders done sooner so you can have enough money in the bank instead of a negative balance.

Why is Business Cash Flow Planning Important?

Business cash flow planning or management lets you make sure your business has enough money to maintain its operations.

If you continually have too much money on hand and your business hasn’t grown in a while, you might use business cash flow planning to determine you should invest more money in marketing, a new product line, more sales staff, or on acquiring a competitor.

If you are continually juggling finances to make sure you keep enough money in the bank, your profit margins may be too slim. To solve this cash flow problem, you may have to raise prices, let go of some staff, find investors, or better optimize your cash flow management.

What Are The Three Types of Cash Flows?

You will hear about three different types of cash flows as you try to get a handle on business cash flow planning. Each one has distinct advantages and disadvantages.

Cash Flows from Operations

Cash flows from operations (CFO), also known as operating cash flows, entails cash flows that occur directly from the normal course of your business, such as when you sell goods or services. And also operating expenses such as payroll.

CFO is an excellent barometer of whether or not your firm has enough incoming funds to pay bills and operating expenses in any given month. There must be positive cash flow for a company to maintain its viability over the long term. Some months can’t be helped, like if you get a huge order (which is great). But for the most part, you want to have enough cash coming in to meet or exceed expenses by the end of the month.

Operating cash flow gives you an idea if you can afford capital improvements or expansions, particularly if you need to invest in more labor, machinery, or software. It can also lead you to the conclusion that you may need extra financing to expand.

CFO is also a useful metric when you want to segregate sales from cash received due to normal operations.

For instance, you just generated a huge sale from a new client. It boosts revenue and earnings. Additional revenue, however, doesn’t necessarily improve cash flow until you collect payments from the customer/client.

How to Calculate Operating Cash Flow

You can calculate CFO fairly simply using accounting or budget/planning software . Take the cash received from sales or invoices during the month and then subtract the operating expenses you paid over the same month.

You record the operating cash flow on a cash flow statement, which you may need when making reports to investors. Publicly traded companies are required to give cash flow statements every quarter and then annually after the fourth quarter in the United States for example.

Cash Flows From Investing

Cash flow from investing (CFI), also called investing cash flow, highlights the cash your company generated from investment-related activities.

Investment-related activities include:

• Buying speculative assets, such as land, foreign currency, commodities, or precious metals.
• Investing in securities, which include stocks, bonds, or stock options.
• Selling securities or assets, such as land your company owns, machinery you no longer need, or being acquired by another company.

Negative investment cash flow might occur due to investments in the long-term growth of your company, like research and development (R&D). This is not always a good thing to do because your research and development needs to pay off at some point.

Cash Flows From Financing

Cash flows from financing (CFF), otherwise known as financing cash flows, highlight the net flows of business cash coming from funding sources that you generally pay with interest.

Financing activities for your company include issuing debt that people can buy, equity, and paying dividends to investors.

Cash flow from financing gives your investors or potential investors insights into your firm’s financial strength and capital structure.

What Are Some Business Cash Flow Planning Terms I Need to Know?

You will need to understand several business cash flow planning terms so you can get a feel for the process and what it takes. Knowing these terms can help you dive into further research or have conversations with a financial planner.

Accounts Payable (AP)

Accounts payable represents the money your business owes to your vendors, service providers, or tax entities. This stems from a contractual business relationship where someone delivers goods or services to you, and you pay them upon receipt of those goods or services. Under your contract terms, you will pay the vendor shortly after you receive what you ordered.

This is essentially what you owe to other businesses. Paying for these goods and services technically weakens your business cash flow, which is why some businesses pay accounts payable late so they have a better cash flow outlook during any given month.

Accounts Receivable (AR)

The opposite of accounts payable, this is the money that your customers owe you after you produce goods or services.

For example, you might produce 10,000 stem bolts for a client in two weeks, and then it takes another week for the batch to arrive at the customer’s destination. Your customer pays you for the stem bolts once they receive them and verify it meets the standards of the purchase order they place.

Accrual Basis of Accounting

The accrual basis of accounting measures the financial position and performance of your business by understanding economic events regardless of when cash transactions occur.

You match revenues to expenses at the time during which the transaction occurs as opposed to when cash payments/transactions are made (or received). This method shows how current cash inflows and outflows are combined with future expected cash inflows and outflows to give a more accurate picture of a company’s current financial condition.

Aged Debt, Aged Debtors & The Aged Debtors Report

Aged debt represents overdue money you pay back based on the agreed payback period, which is commonly 14 days, 30 days, 60 days, or as much as 90 days.

Aged debtors are the ones responsible for paying this type of debt.

You’ll find an aged debtors report in formal accounting circles, and it lists your aged debtors and their aged debt. The report usually groups aged debt by how overdue it is, like less than 30 days overdue, 31 to 60 days overdue, and 61 to 90 days overdue.

Fixed Assets

Your fixed assets are long-term tangible pieces of property that you own and use in the production of your company’s income. It’s not expected to be converted to cash any sooner than one year.

Fixed assets include land, corporate offices, or brand-new machinery or vehicles.

Also called written-off debt, bad debt is money that you owe to a business or a customer owes to you that either party is unable to pay. Usually, bad debts are written off by a business as a tax deduction.

Balance Sheet

Think of a balance sheet as a financial statement that summarizes your company’s assets, liabilities and equity in shareholders at a given point in time.

Balance sheets, usually generated quarterly for reporting, give investors ideas as to what your business owns and owes as well as the amount invested in the company that belongs to stockholders and shareholders.

For example, your balance sheet may look like $5 million in assets, $2 million in liabilities, and $2 million in stock sold, which would give you $1 million in profits or liquid capital.

Bank Reconciliation

Bank reconciliation compares your company’s accounting records to what official bank statements say to ensure they match. When an accountant or report notices a difference in these numbers, it may indicate fraud or a need to update your accounting records

Ideally, you should reconcile your bank account daily, but usually this happens monthly in terms of reporting.

Billing Software

This is a computerized tool that enables the payment processing for companies.

For example, billing software will generate quotes, invoices, and contracts automatically, while also sending out notices to customers at specified timeframes.

You may hear billing software referred to as invoicing software. You’ll find this functionality in your accounting software typically.

Bottom Line

You’ll hear the phrase bottom line a lot in cash flow planning.

It’s the net income for your company, and the term stems from the layout of an income statement because the bottom line is where you see the net income calculation.

Burn rate indicates the rate at which a newer company utilizes its venture capital as overhead before generating its own positive cash flow from operations. It’s a measure of negative cash flow.

Calculate the burn rate thusly:

(Starting Balance – Ending Balance) / # Months = Burn Rate $1.6 million – $1.1 million / 5 months = $100,000/month

Business Agility

Business agility measures your company’s ability to make decisions followed by quick action, particularly if the decisions involve money transfers.

Poor cash flow can prevent your company from being agile, which can hinder your opportunities to make investments, buy a competitor, or avoid risks.

Capital refers to your company’s financial resources available for use.

It could be the financial value of assets, such as $100,000 piece of equipment, or real estate such as a $3 million factory. It might also mean cash, human capital (employees) and even invoices.

Cash Conversion Cycle

Your cash conversion cycle showcases how your company’s dollars are invested in materials, resources, and other items.

For example, you can sell raw materials or products to generate cash, such as making bread and selling it every day.

Short conversion cycles mean you put cash back into your company in short amount of time, like a day or a week. Long conversion cycles may take months or even years, such as when inventory remains unsold and the company stores it for a long period of time.

Cash Flow Forecast

Your cash flow forecast, the ultimate goal of cash flow planning, represents cash flow for your company in a given future time period, usually 12 months.

It outlines your company’s financial planning and notes potential problems, such as seasonal ebbs and flows or an older piece of equipment coming offline, so that your business can take action to mitigate the problems.

You have several ways to forecast your cash flow, which benefits your business so you can be ready for difficulties ahead when they actually happen.

Cash Flow Position

Your cash flow position, or a cash position, simply measures how much money your company has at a particular point in time.

It can measure highly liquid assets, such as food products you sell at a restaurant or inventory you sell online, in addition to having money in the bank.

Having a positive cash flow position is good. However, a very high cash flow position might mean you’re not investing enough money to grow the business.

Cash Flow Projection

A breakdown of the money you expect to come in and out of your business. It includes projected income from sales, contracts, and invoices paid as well as expenses you intend to pay.

Cash Flow Statement

Your cash flow statement (CFS), also known as a cash flow report, indicates how much money you have available to run your company, how much cash moves in and out of the business, where the cash comes from, where it’s going to, and when the cash moves.

Cash flow statements form the basis for cash flow planning because they allow you to think ahead as a business owner. You can pinpoint what time of month or year your company generates more cash or less cash, to give you an idea of when to make smart, long-term decisions to mitigate ebbs and flows.

Cash on Hand

Money immediately available for your company to spend as needed.

Generally, it’s the money in your bank account.

Credit Control

Credit control is when you ensure a customer pays the funds they owe your company.

You’ll see this term used alongside accounts receivable, debtor management, and debtor tracking.

You can send reminders via email or phone call to get customers to pay you, or take other measures if they don’t respond.

Credit Limit

Your credit limit represents the maximum amount of goods or services your business will give to a customer (or a business gives to you) before someone needs to make a payment. Credit limits are usually set in writing when contracts are drawn up. It allows a business to control the risk of not being paid on time or at all.

Credit Terms

Also known as payment terms, credit terms lay out the rules and groundwork between a business and customers that outline specifically when payments must be made.

Credit terms are usually in increments of months, such as 30, 60, or 90 days following the delivery of goods or services.

However, business and customers can agree on any payment terms as they see fit.

Current Assets

Current assets are listed on a balance sheet, and they include cash, accounts receivable, inventory, securities, liquid assets you can turn into cash quickly, and prepaid expenses you can get refunds for if needed.

On a balance sheet, you can typically list assets that can be converted to cash within one year’s time.

Current Liabilities

Current liabilities include your company debts or obligations due within a year from now as shown on your balance sheet.

Current liabilities include short-term debt, accounts payable, accrued liabilities, and more debts that you can pay off within a year.

Debt Principal

This is the amount you borrowed from a lender or investor that your company still owes, which is separate from interest.

Typical loan terms agree that the beginning of the loan front-loads higher interest payments versus principal payments to ensure creditors can recoup more of their money should your company default on the debt.

Depreciation

Depreciation is an income tax deduction you can take as part of business expenses. It covers the cost of owning certain property to allow for wear and tear, deterioration, or having something become obsolete.

The IRS usually sets depreciation rates every year.

Things that depreciate are vehicles, farm equipment, heavy equipment, factory equipment, computers, mobile devices, and anything that has moving parts that needs regular maintenance.

Equity represents stock or other security as part interest in ownership.

On your company’s balance sheet, equity is shown as the amount of cash or funds contributed to your company’s cash flow by stockholders or investors, plus any retained earnings or losses in the course of business.

Your company’s fixed cost does not change over time, even with an increase or decrease in the amount of goods or services you produce.

Fixed costs are expenses your company must pay independent of business activity, and it’s one of the two components of the total cost of a good or service along with variable cost.

Examples include labor, utilities, rent, insurance, and debt payments that go into the fixed costs when determining prices.

Gross Profit

Gross profit represents your company’s revenue minus the costs.

Also known as residual profit, it’s calculated after selling products or services and deducting the costs associated with producing them, marketing them, and selling them.

Income Statement

Also known as a profit and loss statement or statement of revenue and expense, this is a financial statement measuring your company’s financial performance over a month, quarter, or year.

Income statements give a summary of how your business incurs revenue and expenses through operations and non-operational activities.

Interest is a fee paid, listed as a percentage or a dollars-and-cents amount, for using or borrowing another party’s money.

If your company is the borrower, you pay interest for a loan. If you’re a lender, you receive interest as income.

Typically, more interest is paid at the beginning of loan periods instead of the end. Interest rates may be higher based on creditworthiness.

Your company’s invoices are commercial, legally binding documents that itemize transactions between a buyer and seller.

Invoices have standard information, such as:

• How many items purchased
• Price for the items or services
• Date purchased
• Parties involved
• Invoice number
• Any sales tax
• Any extra notes

Invoices may also state any credit terms if the goods or services were purchased on credit by specifying when payments will be made, by whom and with what method of payment.

An invoice is also called a bill, statement, or sales invoice.

Liquidity measures the degree by which an asset or security can be bought quickly if it is to be sold without affecting the asset’s overall price.

Liquidity is high if there is a lot of market activity, such as when higher-than-normal amounts of stocks are bought and sold. Liquidity is low when the opposite is true.

Assets that your company can easily buy or sell are called liquid assets.

Think of a liquid asset as something you can convert to cash quickly. It’s also called marketability, and it’s measured by using liquidity ratios.

Net profit represents your company’s bottom line.

It shows how much your business makes on sales after expenses, interest, costs, and taxes.

Ratio of Cash Flow

Also known as the operating cash flow ratio, this number measures the number of times your company can pay off its current debts with the cash your business can generate within that specific time period.

A higher number above 1 is good in this case. It means you can pay off your short-term debts multiple times because your business generated more cash in a period than your liabilities.

For example, a cash flow ratio of 1.5 in one month means you can pay off 1.5 times your current liabilities in a month. If your current liabilities are $5,000, you can afford to pay off $7,500 of those liabilities with the cash you generate in that month.

Variable Cost

A variable cost represents corporate expenses that vary with production output.

As the name implies, these costs fluctuate depending on your company’s production volume.

Variable costs go up as production increases and go down as production decreases.

Variable costs can be things that change, such as the cost of raw materials, logistics, and labor (particularly overtime or hiring new people).

Your fixed costs plus variable costs equal total costs when shown on a balance sheet.

A vendor is a party, business, or company in the supply chain that sells goods or services to another business, company, or party.

This term describes an entity that someone pays to perform a service or deliver a good. For example, your company buys raw materials from a vendor so you can make your air conditioning motors.

A vendor can operate both as the supplier of goods (seller) and a manufacturer because they would obtain raw materials from a vendor further down the supply chain while selling products on the other end of the supply chain.

There are two types of business cash flow planning methods.

Direct Method of Cash Flow

The direct method of cash flow planning and reporting indicates when you list the actual cash inflows and outflows (income and expenses) your business made during a month, quarter, or year.

This is a common choice for smaller companies.

Indirect Method of Cash Flow

The indirect method of cash flow planning and reporting utilizes ebbs and flows, increases and decreases, in the line times of a balance sheet. It converts the accrual method of accounting to the cash method of accounting for easier number crunching on a cash flow statement.

This method is commonly used by large companies.

With the increasing global economic uncertainty and volatility, there is a growing trend in the usage of business budgeting and planning software solutions that provide valuable insight beyond what the primary accounting and ERP systems provide.

Embrace Continuous Planning To Adapt To Continuous Change

insightsoftware has several solutions for you that help your company budget for the future, avoid budgeting problems , and analyze your finances to come up with a solid plan customized to your company’s situation.

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Important Financial Practices for New Entrepreneurs

• Important Financial Practices for New…

Essential Financial Practices Every New Entrepreneur Should Know

Creating and maintaining a robust financial plan allows us to allocate resources efficiently. With a clear understanding of our financial landscape, we can set realistic goals, plan for future investments, and ensure we have the funds needed to cover our operational costs. This requires not only careful planning but also diligent record-keeping and a keen eye on our cash flow.

Additionally, utilising modern financial tools and technology can streamline our processes and provide valuable insights into our business performance. We can stay competitive and achieve long-term success by keeping our financial practices up-to-date and leveraging the right tools. In the following sections, we will explore various strategies to help us manage our business finances effectively and sustainably.

Establishing A Robust Budget And Financial Plan

Setting up a comprehensive budget and financial plan is the foundation of sound financial management. A budget helps us allocate resources wisely and ensures that we have enough funds to cover all operating expenses. Start by listing all anticipated income and expenses, including fixed costs like salaries and rent and variable costs such as utilities and marketing.

We should regularly review and adjust our budget to reflect changes in our business environment. This approach allows us to stay flexible and responsive to unexpected financial challenges. Monthly or quarterly reviews provide an opportunity to track performance against our budget, identify any discrepancies, and make necessary adjustments. By maintaining a robust financial plan, we can better manage our resources and plan for future growth.

Effective Record-Keeping And Accounting Practices

Keeping accurate records is essential for understanding our financial position and making informed decisions. Effective record-keeping practices include filing all receipts, invoices, and financial documents systematically. Categorising these records into income, expenses, and other relevant categories helps in tracking money flow accurately.

Manual record-keeping can be prone to errors and time-consuming. Utilising accounting software can streamline this process by automating data entry and maintaining organised digital records. Consistently updating our financial records ensures we have the most current data, which is crucial for preparing financial statements and meeting legal reporting requirements. An organised approach to record-keeping will help us manage our finances more effectively and stay compliant with statutory obligations.

Managing Cash Flow For Business Stability

Proper cash flow management is crucial for the stability and growth of our business. Cash flow refers to the inflow and outflow of money in our business and is a clear indicator of our financial health. Positive cash flow ensures that we have enough funds to cover our liabilities and operational costs.

To maintain healthy cash flow, we should implement strategies such as prompt invoicing and follow-ups to ensure timely payments from clients. We can also manage expenses more effectively by negotiating better terms with suppliers or delaying non-essential purchases. Regularly monitoring cash flow statements allows us to spot any potential issues before they become significant problems, ensuring smoother financial operations and long-term sustainability for our business.

Utilising Financial Tools And Technology

The use of modern financial tools and technology can greatly enhance our ability to manage finances efficiently. Accounting software like Xero , QuickBooks , and others can automate repetitive tasks, reduce manual errors, and provide real-time insights into our financial status. These tools can integrate with other systems, offering a comprehensive view of our business operations.

Additionally, expense management apps and cloud-based solutions can help us track and manage expenditures more effectively. These technologies provide us with accurate data that can be accessed anytime, facilitating better decision-making. By embracing these technologies, we streamline our financial processes, improve accuracy, and save valuable time that can be redirected towards growing our business.

Effective financial management is the backbone of any successful business. Establishing a robust budget and financial plan helps us allocate resources wisely and plan for future growth. Maintaining accurate records keeps us compliant and informed about our financial status. Proper cash flow management ensures stability and enables us to meet our obligations timely. Leveraging modern financial tools improves efficiency and accuracy, giving us clear insights into our financial health.

Together, these strategies create a solid foundation for financial success. At 3E Accounting Pte Ltd – Singapore, we are dedicated to helping businesses navigate their financial challenges. With our expert Singapore incorporation services , you can implement these best practices effectively. Contact us today to ensure your business thrives financially and experiences long-term success.

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Mastering finances: five essential tips for small-business owners.

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Justin Goodbread CFP®, CEPA, CVGA, at WealthSource Partners, LLC, is a financial educator, wealth manager, author and speaker.

Being a small-business owner is one of the most difficult and stressful jobs in the world. Everywhere you turn, there's another fire to put out or a crisis to be averted. Although there are always elements beyond your control, you can alleviate much of the stress of business ownership by managing the areas within your control. One of these areas is finance.

In this article, I'm going to look at five easy ways entrepreneurs can get a handle on their finances and mitigate the potential for financial disaster.

1. Separate personal and business finances.

Mixing personal finances with business is one of the most common mistakes I see among business owners. It's tempting to use a single bank account for everything, but this can quickly lead to chaos, financial confusion and even legal trouble.

You see, commingling your personal and business finances could lead to "piercing the corporate veil," leaving you personally liable for your company's debts and liabilities. With the federal government making a greater investment in IRS enforcement , keeping your books straight is all the more important. So what can you do to protect yourself as a small-business owner?

Establish a separate business bank account and credit card. This division makes tracking expenses, calculating taxes and maintaining clear financial records simple. It also safeguards your personal assets from any potential business liabilities. Trust me; it's a smart move.

2. Create a comprehensive business budget.

I often say, "If you aim at nothing, you'll hit it every time." This is especially true with your finances. Without a clear direction for your business's finances, it's nearly impossible to hit your targets. Although budgets often get a bad rap, they're vital to your organization's success. It's your road map to setting realistic revenue and expense expectations. Fortunately, creating a comprehensive business budget doesn't have to be complicated.

Begin by listing each of your income sources and breaking down your expenses. Don't forget to include both the fixed costs (rent, utilities, salaries) and the variable costs (marketing, office supplies, maintenance). However, your budget should also account for those unexpected expenses, savings for future investments and an emergency fund for those rainy days.

Once you've created a workable budget, don't forget to review and update it regularly. This will enable you to stay on track and reflect changes in your business operations and financial goals.

3. Monitor cash flow religiously.

Cash flow is the lifeblood of our small business. It's the money flowing in and out of our company daily. Fumbling with cash flow management is one of the main culprits behind small-business failures. In fact, Business Insider reports that 82% of small-business failures are directly attributed to poor cash flow management. Therefore, keeping a close eye on your cash flow is essential.

Here's how you can make sure your cash flow stays healthy:

• Invoice promptly and follow up on overdue payments.

• Negotiate favorable payment terms with suppliers.

• Cut unnecessary (nonstrategic) expenses.

• Build up a cash reserve for those unforeseen emergencies.

• Consider a line of credit or short-term loans to cover seasonal fluctuations.

4. Consider investing in professional financial guidance.

Look, you may be an expert in your field, but when it comes to financial expertise, we can all use someone with expertise to guide us and hold us accountable. This is the reason that I (a financial advisor) hired a financial advisor.

You see, seeking professional guidance from accountants, financial advisors or consultants can be a game-changer for your business. These professionals can help you make informed decisions, minimize tax liabilities and spot opportunities for cost savings.

Therefore, don't shy away from investing in accounting software or hiring a reliable bookkeeper to keep your financial records in order. It's like having a co-pilot to navigate the financial skies with you, reducing errors and providing valuable insights into your business's financial health.

5. Talk with your trusted professionals to plan strategically.

Taxes are one of the few constants in life. Most of us wish they weren't. However, with a bit of strategic planning, you can legally minimize your tax burden. Understanding the tax code and taking advantage of deductions and credits that are available to you can make a big difference to your bottom line.

Your tax professional can help you develop a plan for your unique situation. Here's a peek into what has worked for me:

• Keep comprehensive records of all business expenses.

• Consider taking advantage of tax-advantaged retirement accounts for yourself and your employees. In 2023, you can contribute up to $22,500 to your 401(k) and $6,500 to your IRA. Plus, if you're 50 or older, you can make "catch-up" contributions of $7,500 and $1,000, respectively.

• Explore small-business tax credits, such as the research and development tax credit.

Remember that in addition to income taxes, you've got to prepare for sales tax, payroll tax and any other applicable taxes for your specific industry and location.

In Conclusion

Friends, managing your finances effectively is a key to success in the small-business world. By following these simple tips, you can navigate the financial challenges and opportunities that come your way with confidence. These tips can help you build a solid financial foundation and set your business on the path to long-term success.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?

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