cash flow nel business plan

Cash Flow Basics for Small Business Explained

Noah Parsons

13 min. read

Updated January 4, 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.

See why 1.2 million entrepreneurs have written their business plans with LivePlan

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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The essential steps for creating a cash plan

Small Business Finance

6 min read

If you’re like many other business owners, the mere thought of managing your finances makes you want to bury your head in the sand. You may find yourself asking, “How can I create a cash plan? Wait—what is a cash plan?” And that’s a great place to start: What exactly is a cash plan? Think about it like this: If your business is a car, cash is the gas. And sometimes, despite our best efforts, the tank hits empty before the next gas station. In order to keep driving your business toward the future you envision, a cash plan ensures that you won’t stall out.

Before you begin, it’s key to understand the difference between profit and cash flow . In other words, the difference between your revenue and expenses as you’ve anticipated versus how they’re actually flowing . You may have already encountered a scenario in which your anticipated profit remains the same even while your current cash position decreases, or maybe your net profit decreases but your cash position increases—no matter the scenario, changes to cash surplus create an immediate impact. And though your business may run unprofitably for a period of time, it won’t run this way forever. In short, your cash plan is a budget for your cash. It’s a cash flow statement for the future, including forecasts of receipts and expected disbursements in the coming months.

In order to create a sustainable and flexible cash plan, there are some vital steps to put in place. Whether you’re working in tandem with an in-house accountant, a financial advisor or going it alone , here’s an overview that’ll help get you started:

1. Set up your cash flow cycle

The whole goal of this process is to control the financial activities in your business to maximize cash flow—and to do that, you need to set a review cadence. Begin by establishing your goals based on a period of time. When will you check in to review the cash flow cycle? Weekly, bi-weekly, monthly, quarterly—or some combination? If your business is in a particularly uncertain position, you may even want to begin with daily reviews. Choose a timeline that works for you and stick with it. Use it not only to see your cash standing today , but also to look back to previous time periods and to project your future cash position.

2. Produce a cash flow statement

At the end of a cycle, generate your cash flow statement . With this, you’ll be able to review your cash position and make any adjustments you need based on the variance report. The critical formula of a cash flow statement is simple: 

Cash Receipts - Cash Disbursements = Net Cash Flow 

The result is a positive or negative net cash flow—that figure is your ending cash position for the cycle, as well as the beginning cash position for the next cycle’s report. 

Once you have a statement set up, don’t just use it going forward. Assuming you haven’t yet created any cash flow statements, work with your accountant (or use your accounting software) to generate cash flow reports for previous cycles. Start with your beginning cash position for this cycle, then pull receipts and disbursement data from your bank account statements and your accounting software, and plug it into the columns for the previous month. Work backward until you produce cash flow statements for three, six or twelve of the previous months. 

3. Forecast your cash 

Remember, your cash plan is nothing more than a cash flow statement for the future, using forecasted rather than historical numbers. With that in mind, here’s another formula for you: 

Projections + Predictions = Forecast

Projections are what you guess your likely sales figures will be based on previous years’ experience. Predictions , on the other hand, anticipate any possible changes in the future that could impact sales for better or worse—plans for marketing, new products or market expansion, for example.

As you forecast cash flow for future periods, you’ll need to anticipate cash receipts from your sales and from accounts receivable, and as well as other miscellaneous or occasional sources. I know, it can feel vague at first to “guess” at figures, but you’re basing this estimation on real numbers.

Cash from sales looks back to previous months in order to estimate an average, and take into account any upcoming factors that might affect this number. For example, say you have a seasonal business and revenue from one season vastly outweighs others. Or maybe you’re launching a highly anticipated new product or service. All of this matters.

Accounts receivable is a bit different. You likely know that your customers don't often pay you minute the minute they get the invoice (but wouldn’t that be nice?). Take a look at the history of your numbers with your accountant and calculate the average amount of time for collection of receivables. Ideally, you want to aim for 30 days or less. If it’s significantly slower than that, you may want to review your credit and collection policies.

Miscellaneous cash sources are things like interest gained, tax refunds, rental income, credit payments, etc. You should be able to predict these numbers fairly regularly and accurately. Don't worry much about predicting smaller, irregular receipts—just focus on major surprises. It’s okay to be conservative in your forecasts—having more cash than you predicted is never a bad thing! Just keep track of those numbers.

4. Review and manage your cash plan variance report

Review your cash flow on a regular basis so that you stay in the know on how things are flowing. If you end a cycle with net positive cash flow, great—you have a cash cushion for any unforeseen circumstances. And on the other end, knowing that your cash position is in the negative can help you plan ahead in other directions. 

Comparing variance reports—which show the difference between your expected cash flow in and the actual income—will also paint a bigger picture of what’s going right or wrong in your business in that given period. Maybe your accounts receivable cash is lower than anticipated, so it’s time to check in with those customers or tighten up your policy. Or maybe, you see that numbers are way up in response to a new salesperson, and you know they’re the right fit for the job. 

Keeping an eye on cash flow in real time is key to proactively managing budgets and staying on track with financial planning. But it’s also important to keep in mind that part of cash planning is to think about and create a cash reserve . In general, aim to determine your average monthly expenses, then build a reserve that’s 2-3 times that amount (or more depending on how big your company is). That way, your business can still run for a couple of months in case of an emergency or unforeseen circumstances. It may take several months to build that reserve up, but it's never too late to start now.

Feeling inspired to implement a cash flow system in your small business, but would like support to get started? We’re here to help.

Written by Adam Traub

Adam Traub is a senior member of the EMyth Coaching Team and an expert in the EMyth Approach. In his nearly 20 years with the company, his experience has included program development, coach training, customer satisfaction and success, and personally coaching hundreds of business owners through the joys and challenges of redesigning their businesses. Adam’s dedication to helping business owners and leaders comes from his own interest in culture and people dynamics, as well as personal experience working through the EMyth Program as a client, where he saw the possibility for all leaders to transform their companies, create a better culture, and achieve their vision.

Cash Flow Statement for Your Business Plan

Know how your money is moving..

It is a common small-business mistake to look at an income statement and conclude that a business is healthy because it is profitable. A profitable business, particularly a growing business, can still run into serious cash problems. A business that runs out of cash soon goes out of business. That’s why your business plan must include a Statement of Cash Flow.

The statement of cash flow starts by looking at the beginning cash and then makes adjustments for things that happen during the period, which impact cash. Finally, the ending cash is calculated for the month. The current month’s ending cash is next month’s starting cash. Open the sample statement of cash flow (below) and step through it from top to bottom. This example will serve as a template for your own cash flow statement.

The starting point for cash flow is the Net Ordinary Income from the income statement. From there, we’ll make adjustments to track actual inflows and outflows of cash.

Definitions

Increase / (Decrease) in Accounts Receiv able. This adjustment can seem counterintuitive at first. It is easiest to understand using the example of the first month of the new business. The income statement showed revenue of $1,000. Since the amounts were invoiced on terms of net 30, no cash has yet been received. Therefore, accounts receivable increased by $1,000.

On the sample cash flow statement, look at the January “(Increase) / Decrease in Accounts Receivable.” To reconcile net ordinary income to cash, we have to subtract $1,000. The cash flow statement has to show the change in accounts receivable from one month to the next.

In our sample financial statements, we made the assumption that 100% of the previous month’s sales will be collected in the next month, and none of the current month’s sales are collected in the current month. Assumptions such as this are reasonable taken as an average and can be used to forecast this line item of your cash flow statement.

(Increase) / Decrease in Accounts Payable. Just as we made an entry above for changes in accounts receivable, we would have a similar entry for the change in accounts payable. If our accounts payable (bills owed but not paid) increase, we would have to subtract the amount of change to reconcile cash to net operating income. Most new, small businesses are required to pay their bills in the current month. As such, accounts payable stay at approximately $0. All bills are paid at the end of the month. With no change from month to month, no cash flow adjustment is necessary.

Let’s continue with the other adjustments, which are more straightforward.

Deposits and Prepaid Expenses . A deposit or prepaid expense doesn’t show up on the income statement because it is not a current expense. Yet it takes away from cash in the bank. When our sample business signed an office lease, it had to provide a security deposit of $2,000 in February. This isn’t “rent,” it’s a deposit. You’ll see this number again when we talk about the balance sheet. But for now, we need to subtract this amount, $2,000, in February to further reconcile net operating income to cash. You’ll see this entry in February of our sample statement of cash flow under Deposits and Prepaid Expenses.

Capital Purchases. For an understanding of how capital purchases and depreciation work together, read the capital purchases section and the depreciation section together (see below).

When you purchase a piece of equipment, the impact on cash is immediate. However, the full expense only shows up on the income statement over a longer period of time. So once again, we have to make an adjustment to reconcile net operating income to cash. This is a two-part exercise. First we take into account the purchase and then the “depreciation,” which is highlighted below.

To account for the purchase price of the asset, we make an entry for the full cost on the statement of cash flow in the Capital Purchases line. In our sample financials, you’ll see that the business made furniture, equipment or other capital purchases of $12,000 in January, $5,000 in March and $3,000 in August. These are shown as negative numbers because they take away from cash.

Depreciation. When you purchase an asset such as a piece of equipment with a useful life greater than the current year, the government requires the asset to be written off over a longer period of time. You can’t simply create an expense for the full amount in the current period. Why does the government care? They don’t want businesses making large purchases just to reduce taxes. The rules governing depreciation are complex and vary by the type of asset. Here we’re addressing only how depreciation affects cash flow.

In our sample company, our “sample accountant” has calculated a depreciation schedule for each type of asset and told us to spread out depreciation expense evenly over the course of the year at $1,000 per month. On the income statement, this keeps the expense even instead of creating a big hit in a single month. However, this depreciation isn’t a cash expense, it’s just a write-off against taxable income. On the cash flow statement, we have to add back depreciation to reconcile cash to net operating income. See the sample statement of cash flow where we’ve added back $1,000 in each month.

Net Cash from Operations. The sum of the net operating income and the adjustments to reconcile to cash (detailed above) equal the net cash from operations. This is a subtotal on our way to showing the month-ending cash balance.

Financing Activities. Since financing activities (all loans and capital investments) impact the cash flow statement much in the same way, we’ll cover them all in this same paragraph. Each time you receive money for a loan or capital investment (whether by an owner or investor) the proceeds need to show up on your statement of cash flow. Money or “cash” comes into the business and it needs to be accounted for.

While interest on a loan is an expense and therefore found on the income statement, principal repayment is not categorized as an expense. Therefore, to reconcile the income statement to cash, we have to show these repayments on the statement of cash flow. Loan repayments take away from cash and are therefore shown as a negative number on the cash flow statement.

On the sample statement of cash flow, you can see that the business received loan proceeds of $40,000 in January, plus an investment from the owner (Capital Stock) of $15,000 also in January. Then, the company repaid $1,000 in principal each month of the year. These monthly repayments reduce cash.

Net Cash Increase / (Decrease). Continuing down the Statement of Cash Flow, the Net increase / (Decrease) in Cash is the fully reconciled change in cash for the period. In other words, it takes into account net ordinary income, adjustments for changes in accounts receivable, deposits and prepaid expenses, capital purchases and depreciation. Next, the adjustments for financing activities are accounted for as described above. The sum of the net ordinary income and all of the adjustments is the net increase or decrease in cash.

Beginning and Ending Cash. In the sample financial statements, the Ending Cash for January is $37,175. Notice that the Beginning Cash for February is the same amount, $37,175. Beginning Cash for any period is simply the ending cash for the prior period.

To calculate the Ending Cash, you add the Net Cash Increase or Decrease to the Beginning Cash. In other words, take what you started with, take into account the change in the period, and what you have left is the ending cash. In our sample financials, in January the business started with nothing (since that’s the month the business was started), and the Net Increase in Cash was $37,175. Therefore the Ending Cash for January was $37,175, or $0 + $37,175. As you can see, the business took out a loan, received a capital investment from the founder, made some capital purchases, and had a net ordinary loss.

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No matter what your business planning objectives, cash flow is still the most vital resource in the business, and managing cash is the single most important business function. Without cash, you go under. So I always assume cash flow is included in every kind of real business plan. And it is the most important component of standard business plan financials. This is another of my series on standard business plan financials .

(Important: If you’re using LivePlan, life gets a lot easier for you. Please read LivePlan Cash Flow instead of this post. )

The Projected Cash Flow is what links the other two of the three essential projections, the Projected Profit and Loss and Projected Balance Sheet, together. The cash flow completes the system. It reconciles the Profit and Loss with the Balance.

Experts can be annoying. There are several ways to do a cash flow plan. Sometimes it seems like as soon as you use one method, somebody who is supposed to know tells you you’ve done it wrong. Often that means that expert doesn’t know enough to realize there is more than one way to do it.  I’m doing direct cash flow for this post. I may do indirect in a later post.

Direct Cash Flow

So here is a direct cash flow plan. You can see the potential complications and the need for linking up the numbers from the other statements. Your estimated receipts from accounts receivable must have a logical relationship to sales and the balance of accounts receivable. Likewise, your payments of accounts payable have to relate to the balances of payables and the costs and expenses that created the payables. Vital as this is to business survival, it is not nearly as intuitive as the sales forecast, personnel plan, or income statement. The mathematics and the financial projections are more complex.

Here’s a sample Projected Cash Flow for a bicycle shop, so you can see how that works:

Estimating Receipts from Receivables

The first two rows of Garrett’s cash flow projection depend on detailed estimates of money coming in as his customers on account pay their invoices. To estimate that, he lays out his guess based on the assumption that only 10% of his sales are on credit (on account), and that his customers pay their invoices in about one month on average. That estimate looks like this:

In this case, the sales on credit are 10% of the estimated total sales in the Sales Forecast, $26,630. That’s the result of Garrett’s assumption, based on the nature of his business. And the money involved comes in one month later. This worksheet projects the Accounts Receivable value in Garrett’s Projected Balance Sheet, as well as the Received from AR value in the Projected Cash Flow. The receivables analysis depends on information in the Profit and Loss Projection, plus an assumption about Sales on Credit, and another on waiting time before payment. And it affects the Projected Balance and the Projected Cash Flow, as shown in this next illustration:

Estimating the Impact of Inventory

Inventory presents another set of important cash-related assumptions. I explained earlier that in the case of inventory, proper accounting practices require special details. The cost of inventory that shows up in the Projected Profit and Loss is related to timing of sales. The actual cash flow implications of inventory depend on when new inventory is purchased, as shown here:

As with Accounts Receivable in the previous illustration, the inventory analysis depends on information from the Sales Forecast, and it sends information to both the Projected Balance Sheet (Ending Inventory) and the Projected Cash Flow (Inventory Purchase).

Estimating the Impact of Payables

Most businesses wait a month or so before they pay invoices for goods and services received from other businesses. That means we can save on our cash flow by holding back some money and paying it later. With proper accrual accounting, that money is recorded on the Balance Sheet as Accounts Payable. Estimating Accounts Payable takes a careful combination of calculations and assumptions. First we have to collect the full amount of payments. Then we account for payments made immediately, not held in Accounts Payable. After that, we estimate how long, on average, we hold payments. That analysis is shown below:

In this case, it is assumed that the store will pay its bills about a month after it receives them.

Cash Flow is About Management

Reminder: you should know how to project cash flow using competent educated guesses based on an understanding of the flow in your business of sales, sales on credit, receivables, inventory, and payables. These are useful projections. But real management is minding the projections every month with plan vs. actual analysis so you can catch changes in time to manage them. The illustration here shows projected profits for the bicycle store compared to the projected cash flow, using the projections presented in this chapter:

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• Cash Flow Projection – The Comple...

Cash Flow Projection – The Complete Guide

Table of Content

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 will explain everything you need to know about cash flow projections – to help you confidently navigate the financial landscape of your business.

What Is Cash Flow?

To grasp the concept of cash flow projections, we must first understand the essence of cash flow itself. Cash flow is all about the movement of money flowing in and out of business. It reflects the company’s financial health and liquidity, capturing the inflows and outflows of cash over a specific timeframe.

To truly grasp your business’s financial landscape, you must understand the stages of cash flow: operating, investing, and financing activities, and how to analyze and make sense of it.

Read more to uncover a step-by-step guide on how to perform a cash flow analysis (template + examples) and methods to assess key items in cash flow statements.

What Is Cash Flow Projection?

Cash flow projection is the process of estimating and predicting future cash inflows and outflows within a defined period—usually monthly, quarterly, or annually.

Think of cash flow projection (also referred to as a cash flow forecast) 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 (aka 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.

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 statements and projections, small business owners can use these tools more effectively to manage their finances and plan for the future. 

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.

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

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 a period of 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

• Want to determine where you’re going? Take a look at where you’ve already been. 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. Read on to discover the business use cases of implementing a treasury management solution for optimal cash flow management .

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 outflows 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 outflows. Learn more about analyzing projected cash flow statement .

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 begin 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 in 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.
• 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 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.

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. 

Benjamin Franklin once said, ‘Beware of little expenses; a small leak will sink a great ship.’ This underscores the importance of managing and understanding cash flow in business. 

Download this 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 projections models that don’t mirror the actual workings of your finance force.

Cash flow projections are only as strong as the numbers behind them. No one can be completely certain months in advance if literal or figurative storm clouds are waiting for them on the horizon. 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.
• Reflect the payment behavior 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 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. Finance teams have no choice but to abandon it and let it gather dust for the remainder of a month.

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

Professionals in Controlling or 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 that 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, such dependable partners often offer customization options, allowing you to 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 budget 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, totaling 12 hours per week or 624 hours per year. Whether you are an enterprise or an SMB, learn how a 13-week cash flow projection template can help you keep your business on track and achieve your financial goals.

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 may include:

• 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.

HighRadius has consistently provided its customers with powerful AI and forecasting tools to support real-time visibility, historical tracking, and predictive insights so your teams can reap the benefits of automated cash flow management.

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. 

Cash Flow Projection FAQs

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 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 be helpful in determining whether your business has enough cash flow to maintain its regular operations during the given period. It can also provide valuable insight into how to allocate your budget effectively.

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 is projected cash flow and fund flow statement?

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

5) What are the 4 key uses for 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

Balance Sheet Forecasting: A Complete Guide to Financial Forecasts

How to Improve Cash Flow: Top 12 Strategies

5 Treasury Technology Trends that CFOs Should Look For in 2024

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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.

QuickBooks Online

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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• Example of a cashflow
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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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ACCA Cashflow Template

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Business Plan Cash Flow Template

Identify the operating period, establish sales forecast for the period, calculate cost of goods sold, determine gross profit, identify expected operating expenses.

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Calculate net income before taxes

Estimate income tax expense, calculate net income, adjust for non-cash expenses, approval: cash flow calculations.

• Calculate net income before taxes Will be submitted
• Estimate income tax expense Will be submitted
• Calculate net income Will be submitted
• Adjust for non-cash expenses Will be submitted

Determine changes in working capital

Calculate cash flow from operating activities, identify investing activities, calculate cash flow from investing activities, identify financing activities, calculate cash flow from financing activities, reconcile beginning and ending cash balances, approval: final business plan cash flow template.

• Calculate cash flow from operating activities Will be submitted
• Calculate cash flow from investing activities Will be submitted
• Calculate cash flow from financing activities Will be submitted
• Reconcile beginning and ending cash balances Will be submitted

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• Cash Flow Planning

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on March 29, 2023

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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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• 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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Positive Cash Flow Starts with Your Business Plan

Author: Laura Nelson, Senior Vice President, Small Business Banking

Cash flow is the heart of any small business. It’s at the center of how your business operates, supporting your ability to cover expenses, pay staff, invest in growth and everything in between. Without a positive cash flow, your business can’t survive.

Cash flow is the inflow and outflow of a company’s money. It enters your business as customers buy products or services and exits as you cover everyday expenses. The best way to decide whether your business is in a position to expand is to take a long, hard look at your cash flow and make sure you're managing it properly. But many small businesses make the mistake of spending without considering the future. For example, businesses often tie up money in excessive inventory instead of keeping it readily available to meet their short- and long-term goals and obligations.

Staying current on cash needs is a balancing act between paying bills on time, planning for the future and managing emergencies. Most successful businesses find this balance by building certain characteristics into their business plans.

Characteristics of Strong Cash Flow Businesses

A business that is successfully managing its cash flow likely has low overhead costs, which means it doesn't spend a significant amount of money on fixed expenses such as rent, salaries, utilities or other operational costs. By keeping these costs low, businesses can allocate more funds toward marketing, sales and product development. Additionally, lower overhead costs mean businesses are less susceptible to cash flow problems in times of economic uncertainty.

A healthy cash flow business is scalable, meaning you can grow the business without pouring a significant amount of money into it. Scalability is essential because it allows businesses to expand operations and generate more revenue without putting a strain on their finances. Businesses that aren’t scalable can face cash flow problems as they try to grow, which can lead to financial instability and even bankruptcy.

Another key to maintaining a strong cash flow business is creating a source of recurring revenue, meaning you’re able to generate income on a regular basis without relying on one-time sales. Recurring revenue is essential because it provides predictable cash flow that businesses can rely on, even if times get tough temporarily. Examples of recurring revenue streams include subscriptions, maintenance contracts and service agreements.

A healthy cash flow business has high profit margins, which means it generates a significant amount of revenue compared to its costs. High profit margins allow businesses to generate more cash flow from each sale, which in turn can be used to invest in marketing, product development and other areas of the business. Additionally, high profit margins make businesses more resilient to changes in the market or unexpected expenses.

To maintain a strong cash flow, a business needs to be simple to operate. It should have streamlined processes, efficient workflows and minimal administrative tasks. By keeping operations simple, businesses can reduce the time and resources required to manage the business, which can improve cash flow. Additionally, simple operations can help businesses avoid costly mistakes, such as overproduction, missed deadlines or inventory stock-outs.

By modeling your small business to match these characteristics, you can monitor and manage your cash flow to maintain financial health, plan for the future and invest in growth opportunities. If you’re not satisfied with your cash flow, it may be time to reevaluate your business plan. Your business plan can act as an accountability tool for your company and can create a roadmap of goals and action steps that will allow you to weave in effective cash flow tactics and set your business on the right course.

Interested in correcting your business plan? Learn how with our step-by-step guide and template .

And for more information on how FNBO can help your small business succeed, visit our website or find a branch near you .

The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.

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9 Reasons Your Business Needs a Cash Flow Plan

Having a cash flow plan is integral for all kinds of businesses, whether they’re just starting out or have been operational for years and decades.

The reason is there are many benefits to cash flow planning . Chief among those are being able to track your company’s incoming and outgoing expenses and plan your cash flow strategy.

But not all companies are familiar with cash flow plans. In fact, many businesses fail in the first 5 years because they don’t have such a plan or know how to create one.

In this article, we’re going to explain what a cash flow plan is along with the top 9 reasons to use one for your business.

What is a cash flow plan?

It’s a plan prepared by you as a company or by a financial advisor to help you estimate and track your incoming and outgoing cash.

By tracking where the money is coming from and where it’s going, a company can decide what to do with its money, estimate when it can turn a profit, and how it can use this money.

The process is called cash flow planning.

It’s worth noting that operating, investing, and financing activities are all included within the cash flow plan.

Who uses a cash flow plan?

The cash flow plan is of interest to several stakeholders, some within the company itself and some outside it.

These stakeholders include:

• Accounting personnel, who need to know if the company can cover its current expenses, pay its debt (if applicable), and cover its payroll.
• Banks, who may act as lenders or creditors for a potential loan or other financial needs.
• Potential investors, if the company is looking to get an investment or a funding round.
• Potential contractors, who may be looking to create a business relationship with the company or whom the company is looking to outsource work to. Contractors use the cash flow statement or plan to determine if the company will be able to compensate them for their services.
• The company’s top management and shareholders.

Now that you know what a cash flow plan is and who would want to use it and what for, let’s look at why you need one.

Reasons your company needs a cash flow plan

Having a cash flow plan can help new and operational businesses in a variety of ways.

In fact, many companies and startups that don’t perform cash flow planning end up failing before they’re able to generate revenues and profits.

This means that having a sound plan can help new and small companies as well as large and established ones.

Here are 9 ways companies can make use of a cash flow plan.

A cash flow plan:

• Offers a detailed plan of expenses and where your company is spending its money. When this data is analyzed month after month, you can then decide what your essential expenses are and what can be omitted or considered extra.
• Offers a detailed forecast of your incoming cash and where it’s coming from. This is particularly important for companies that have multiple revenue streams. The cash flow plan will show you how much you’re making from each income stream.
• Helps your business compare your actual spending to your financial forecast and see if your forecasts were estimated correctly or not.
• Reduces guesswork when it comes to your company’s finances.
• Helps businesses see the effect of their spending. If your company spends $10,000 on advertising but you’re not getting results, your cash flow plan will show you that’s something is wrong with this process, which you may have to suspend until this issue is resolved.
• Shows you the peaks and lows of your company’s cash flow during a fiscal year or any predetermined time frame. For example, companies that rely on seasonal revenues like air conditioning businesses, or those that sell ice cream. Agricultural businesses often fall in this category because fruits and vegetables are seasonal, resulting in seasonal cash flow.
• Helps you understand how your receivables from sales, credit terms, and your deals with suppliers are affecting your working capital. 
• Reveals potential spending problems or funding gaps, allowing you to prioritize and plan your upcoming larger expenses such as repaying a company loan or paying a major supplier.
• Keeps you aware of your business burn rate, which is the rate where a new company or startup is spending its raised funds or venture capital before it begins generating a positive cash flow from its operations. The business burn rate , also known as startup burn rate, measures a company’s negative cash flow and is quoted as cash spent per month.

By using a cash flow plan, you can keep an eye on your business burn rate, plan ahead, and meet your monthly financial obligations. If a company has a burn rate of EGP 1 million, this means it’s spending EGP 1 million per month.

As you can see, there are many benefits to having a cash flow plan.

It helps you estimate and understand the flow of your finances and helps you make sound financial decisions, which in turn mean your startup can remain operational and avoid pitfalls and overspending.

By understanding the importance of creating a cash flow plan, a business can not only survive the initial phase but it can move on to generating revenues and subsequently profits.

By using cash flow planning, startups can estimate what they need when they first launch ttheir product and what they’d need afterwards. They can decide what they can do internally and what they would need to outsource and so on.

The process of creating a cash flow plan can be a bit of a tedious one. Not to mention, it requires someone with a financial background that can ask the right questions and create a plan accordingly.

A financial advisor, like Stride , can help you create a cash flow plan to support your business, its needs, and its future.

Get in touch today!

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Why small business should pay attention to sales and cash flow.

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Vlad Rusz is a CPA at Centaur Digital Corp , helping busy business owners efficiently manage their accounting system.

Business owners tend to overengineer their accounting without first analyzing the relevance of the data. As a business grows more complex, there can be too much information, which can make it difficult to make quick and meaningful decisions. To distill this information into useful, actionable data, a business can rely on key performance indicators (KPIs). KPIs can help a business quickly identify relevant information needed for decision-making.

For small businesses with less than $500,000 in sales and without external investors, the most important KPIs to track are sales and cash flow. While other metrics might provide meaningful information, they rely on a well-functioning accounting system, which some small businesses don’t have. The following points will show small-business owners why sales and cash flow provide adequate information to run their business.

Sales is the lifeblood of a small business. Unlike venture- or investor-backed businesses, small businesses rely on the cash coming in the door to pay their bills. A drastic change in sales can mean a quick shift from profitability to losses. Conversely, it can lead to fulfillment issues if growth is too sudden. Luckily, most business owners know where their sales come from and the importance of sales to their business. Any rudimentary bookkeeping system will track sales, and thus this information is readily available to the business owner. In the absence of a bookkeeping system, sales can be calculated quickly by looking at deposits in the bank account or reports from a shopping card or point-of-sale system.

Why Cash Flow?

Profit is typically the gold standard by which businesses are measured. However, for small businesses, this profit number can be misleading. For example, sole proprietorships do not count payments to owners as a wage expense, and thus this amount is omitted from profit. The same omission is present for S corporations and partnerships. A better alternative is cash flow—specifically net cash flow , which is the amount of cash that the business receives or uses in a certain time period. Even if your bookkeeping is nonexistent, this amount can be easily calculated by looking at the change in your business checking account balance. While this amount won’t tell you your taxable income, it will tell you how much cash has been generated by the business, which is just as important.

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Despite what some accountants might have you believe, you can run a business successfully without an accountant or even bookkeeping software. It might not be recommended, but it’s possible. It’s also possible that inadequate bookkeeping can be more troublesome than no bookkeeping since it can provide false information instead of no information.

Sales and cash flow can be easily verified or calculated on the spot without a bookkeeping system and can provide enough information for a business owner to get a good sense of what is going on in their business. However, as the business grows, these KPIs will be insufficient by themselves, but by then the business should be profitable enough to afford a well-developed and well-managed bookkeeping system.

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

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• What is a cash flow statement? 

Components of a cash flow statement

What is negative cash flow.

• How to read a cash flow statement 

What to watch for in a cash flow statement

• The significance of cash flow 
• Cash flow vs. profit: Understanding the difference 
• The role of cash flow in assessing company health 
• Preparing a cash flow statement 

Cash flow statement FAQs

Understanding a cash flow statement.

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• A cash flow statement is one of three key documents used to determine a company's financial health.
• Cash flow statements provide details about all the cash coming into and exiting a company.
• A cash flow statement alone will not show all the necessary financial data to accurately analyze a company.

Companies with stocks that trade on public exchanges are required to periodically disclose a wide range of documents with detailed information about their operations. The cash flow statement is one of the most important to understand.

What is a cash flow statement? 

Definition and overview.

Cash flow statements are financial accounting statements that provide a detailed picture of the movement of money through a company — both what comes in and what goes out  — during a certain period of time. Using the information contained in a cash flow statement, business owners, shareholders, and potential investors can see how much cash a business is bringing and how much it's spending in a given period. In conjunction with other documents, cash flow statements can help you understand how financially healthy a company is.

Usually, cash flow is divided into three main categories: operations, investment, and financing. "Cash flow statements really just show business operations' impact to cash," says Dondrea Owens, CPA and founder of The Creative's CFO . 

A company's cash flow statement is one of three key reports that investors and other interested parties use to determine its financial performance. The others are the income statement and balance sheet. Together, they depict a company's finances. In the US, the Securities and Exchange Commission (SEC) requires publicly traded companies to provide them. 

Though all three documents deal with a company's money, they look at it from different angles. "We find that a lot of folks start with the balance sheet and the income statement," says Meredith Tucker , CPA at Kaufman Rossin . "And yet, I think the cash flow statement is one of the most helpful."

Cash flow provides important context to information that might not be apparent on a different financial statement. If a business makes a sale to a customer, that revenue often goes on an income statement and contributes to the company's overall profit or loss. However, if an invoice isn't due right away or the company extends a line of credit to the customer, the actual cash may not hit the company's bank account for months. This is why understanding cash flow is so important. 

In general, cash flow statements show a company's ability to operate. If an organization doesn't have enough cash to pay its expenses during a given period, it may not matter how many realized sales it has made. 

"From an investor standpoint, I want to know how a company is using the money I'm going to give them," Tucker explains. This is another reason cash flow statements can be important. They don't just show how much money was spent, but where it was spent.

"Are they diverting cash to repay debt? Are they distributing it out to shareholders? Are they losing money because they're extending more and more credit to their customers? Those are the kinds of things we want to see," Tucker says.

Knowing the key components of a cash flow statement is important for anyone who wants to understand the financial health of a company. Cash flow statements start with the amount of cash an organization had at the beginning of an accounting period and finish with the amount of cash the organization has at the end of the period. Everything in the middle details cash transactions as money entered and left the company. 

In general, this middle portion will be separated into three distinct categories: operating activities, investment activities, and financing activities. Within each category, line items show where money went or came from. 

Not every company will have the exact same line items on its cash flow statement, which Owens says is normal and not a cause for concern. Usually, money entering the company will be written as a numeral, and money exiting the company will include parentheses around the amount.

Operating activities

"The operating section is going to tell you about all the run-of-the-mill things that affect cash," Tucker says. These are the types of cash activities many people automatically associate with running a business: income from customers, wages to staff, inventory purchases, and income taxes, for example. 

In the statement above, you can see that within the last year, $975,000 was paid to the company from customers, and the organization spent a total of $563,050 on all operating expenses. In this example, the organization's operating costs come from inventory purchases, operating and administration expenses, wages, interest, and income taxes. The net cash flow from operations lines shows the difference between these two numbers, in this case, $411,950.

Investing activities

The net cash flow from the investing line shows the change in cash flow from all investing activities. In a business, investment activities may include the purchase or sale of physical assets, investment in securities, or the sale of securities. 

In the example above, the business only had two items that could be categorized as investment activities: selling property or equipment for $33,600 and purchasing property or equipment for $125,000. In this category, the company spent $91,400 more than it brought in, making that number its net cash flow from operations.

Financing activities

The final category on the balance sheet shows all cash transactions that had to do with financing activities. Things that would go in this category include activities that involve debt, equity, or dividends. In our example above, the company paid $38,000 and $52,000 to loan repayments and dividends, respectively. The organization didn't bring in any money through financing activities, so the net cash flow from financing is negative $90,000.

Negative cash flow appears when a company spends more than it generates in a certain period. A company may have an overall negative cash flow or any one of the sections may have negative cash flow, as the previous example shows in the investing and financing sections. 

"Negative cash flow isn't always bad," Owens says. "Companies do go through growth phases where they are spending money to make money." As long as the negative cash flow is planned, it's not an immediate red flag. 

Negative cash flow could also come down to a timing issue. "An accounting firm is a perfect example," Tucker explains. The busy season for accountants is often the beginning of the year when taxes are due, but most of those receivables won't be paid immediately. Though the business is generating revenue, the cash isn't in the account yet. 

On the other hand, if there is a pattern of cash flow issues, that could be a warning sign that the company isn't managing its money well. If you see a negative cash flow, it's worth looking into the reason to determine whether or not it's cause for concern.

How to read a cash flow statement 

Identifying cash sources and uses .

Businesses can obtain cash from various activities, ranging from selling their goods and services to selling securities at a profit. The most basic sources of cash, for example receiving income from customers, are outlined in the operating activities section of the cash flow statement. 

Companies can also generate cash flow by issuing equity or borrowing money. Both of these come with their own unique costs and benefits. Issuing equity does not come with the same obligations as taking on debt. If a company borrows money from a bank and is unable to pay that money back, the lending institution could go after the organization's assets in an attempt to recover the funds it lent out in the first place. 

Analyzing the company's liquidity and financial flexibility 

You can get a good sense of a company's liquidity by using the cash flow statement to determine working capital, funds that are used to ensure that a business can operate in the short-term. To determine working capital, subtract its liabilities from its assets. 

Assets are composed of cash and near-cash assets such as short-term liabilities, while liabilities would include money you owe to vendors and employees, as well as taxes you must pay. 

Though a cash flow statement can't tell you everything about a company's financial viability, there are some things to watch out for in them that can be particularly telling. "A green flag for me is if there is positive cash flow coming from operations," Owens says. "That's a good sign that the company is generating cash just from its operations."

On the flip side, he explains that negative cash flow from operations could be an indicator that something isn't going well with the company and might require additional research. 

Owens also recommends looking at the financing section, particularly to see if the business is bringing in most or all of its cash from loans or other sources of financing. "This isn't always a bad thing," she says. For example, it might be normal in a startup. But if most of the money is coming from financing, it's worth taking a second look, especially if the money will eventually need to be repaid. In general, the more cash that comes from operations, the better, Owens says. 

The significance of cash flow 

Cash flow vs. profit: understanding the difference .

Cash flow represents the money moving in and out of a business, whereas profit is what an organization has after subtracting all of its expenses from its revenue. 

Both of these terms can be either positive or negative. A company can have positive or negative cash flow, or alternatively, it can be generating positive profits or negative profits, which are generally described as losses. 

The role of cash flow in assessing company health 

Reviewing a company's cash flow will help an investor obtain a sense of how well-prepared that organization is to cover its financial liabilities. It can also help give investors greater insight into whether an organization is expanding or is in decline. If a company is repeatedly experiencing negative cash flow, this could hamper its ability to put money toward activities that would generate expansion, for example marketing, sales and public relations. 

Further, a company that keeps generating negative cash flow might have to lay off employees in order to generate positive cash flow. These cutbacks could in turn impact an organization's ability to function. 

Cash flow statement vs. income statement vs. balance sheet

Though cash flow statements include plenty of helpful information, they alone will not tell you a company's entire financial picture. They work best when analyzed in conjunction with the income statement, which shows its profit or loss, and balance sheet, which details assets and liabilities. At times, one statement may answer a question the other poses. For example, if you look at a company's balance sheet from one year to the next and see its cash assets went from $1 million to $500,00, at first glance, this could look alarming. But, if you follow up with the cash flow statement, you may see the money was used as part of an investing activity and went toward the purchase of another facility that could increase the company's profitability long-term. "Make sure you understand the story that these financial reports are presenting to you," Tucker says. "You really need the interplay to interpret the full story."

Preparing a cash flow statement 

Steps and key considerations .

The first step in preparing a cash flow statement is determining how much cash (and cash equivalents) a business has at the beginning of the period in question. This gives you the starting balance. 

The next step is to determine cash flow from operating activities. One way of assessing this, called the direct method, involves calculating the cash brought in through operations and subtracting the cash spent through such activities. This method involves accounting for all transactions that resulted in cashing going into (or out of) a business during the specified time frame. 

After that, determine cash flows associated with investing activities, which involves the purchase or sale of any assets like securities or real estate. 

Creating the next section of a cash flow statement involves calculating any cash that went in or out of a business as a result of financing, for example issuing equity or taking on debt. 

Once you have calculated the aforementioned amounts, you can use it to determine how much cash (and cash equivalents) a business has at the end of the period in question. You can subtract the starting cash flow from this amount to figure out how much cash a company made (or lost) during the period. 

A cash flow statement provides information on a company's financial health and liquidity, as well as its ability to function in the short-term. 

A cash flow statement includes actual cash transactions, while an income statement can list non-cash receipts. The balance sheet, alternatively, offers a summary of a company's assets and liabilities during a certain period. 

Negative cash flow can potentially indicate a company putting money toward its own expansion. However, sustained negative cash flow can signal that an organization is struggling financially. 

SEC regulations obligate publicly traded companies to produce cash flow statements on a quarterly and annual basis. 

Small businesses can most certainly benefit from creating cash flow statements, as these documents can help them keep track of how easily they can pay for their short-term obligations and make long-term strategic plans.

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