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Cash Flow Management: Techniques and Tools

Matt D'Angelo
Matt D'Angelo

Cash flow management is an essential skill that all business owners should possess. These techniques and tools make it easier to manage cash flow.

  • Cash flow management involves understanding upcoming expenses and comparing them against accounts receivable and future sales.
  • To project cash flow, analyze your prior year's numbers, then adjust for anticipated changes, such as new pricing, more personnel and funding sources.
  • By understanding cash flow techniques, you'll come to predict cash flow, which allows you to ensure your company is in a strong financial position.

Cash flow is one of the most important aspects of your small business. Without healthy cash flow, it's impossible to grow your business, hire new workers and properly manage your finances. Managing cash flow is not always a simple feat. It's important to fully understand associated terminology, basic strategies and other aspects of cash flow before getting started.

If you're a business owner, it's essential that you understand and track your cash flow; you need to know how the amount of money you bring into your business compares to the amount going out. If you're spending more than you're earning, you need to make changes to avoid going bankrupt.

"Put simply, cash flow is the money that will be coming in and going out of the 'register,'" said Ron Pac, a financial planner at Barnum Financial Group. "Managing cash flow means understanding upcoming expenses and comparing them against accounts receivable as well as projected future sales."

It's important to regularly track the movement of funds in and out of your organization to determine the financial status of your business and what it will be in several months.

"Cash gives our business power – the power to hire the best talent, purchasing power for the goods and services we need to grow to take advantage of new opportunities that may arise," said Div Bhansali, vice president of marketing at AccountantsWorld.


What is cash flow management?

Understanding cash flow management is vital to the success of your business. If you can accurately project cash flow, you will steer your business in the right direction.

If you understand cash flow techniques, you can get ahead of the market. You'll even come to predict cash flow, because you understand the revenue cycles of customers, vendors, suppliers and contractors.

Every business has high seasons and low seasons; understanding upcoming expenses for employee overtime, replacement equipment, and other needs goes a long way to ensure your business is well positioned to handle any bump in the road.

How to calculate cash flow

One of the most important aspects of managing cash flow is understanding how to calculate it.

There are three main formulas that can help you calculate cash flow: free cash flow formula, operating cash flow formula and cash flow forecast.

Each formula serves a different purpose. The free cash flow formula shows you how much capital you have on hand to reinvest in your business. That could mean purchasing new equipment, expanding your store or investing in a new product for your company.

Cash flow formula

Free cash flow refers to the resources available for distribution among all the stakeholders in the company.

The operating cash flow formula provides an at-a-glance view of the day-to-day cash flow within your business.

The cash flow forecast provides a future look at what your cash flow will look like in the coming month, quarter or even year.

All three of these formulas are essential to knowing how much money is flowing in and out of your business at any given time. The formulas are as follows:

  • Free cash flow = Net income + Depreciation/Amortization - Change in working capital - Capital expenditure

  • Operating cash flow = Depreciation + Operating income - Taxes + Change in working capital

  • Cash flow forecast = Beginning cash + Projected inflows - Projected outflows = Ending cash

Projecting cash flow

Determining when you'll receive – and spend – money is part of the budgeting process. To successfully project cash flow, assess your prior year's numbers as a basis of cash flow for the following year. Then, adjust for anticipated changes, such as new pricing, more personnel and funding sources.

As the year unfolds, you should update your cash flow projections to accurately reflect developments in expenses and profits. Comparing budgeted cash flows to actual deposits and expenditures helps you predict cash flow later.

Another strategy is to add the cash you already have to the cash you plan to receive. Then, add up how much of that money you plan to spend.

Even the most successful organizations find that their forecasts change regularly, so it's important to monitor cash flow. 

There are several tools and software applications designed to help you track your business's money. Another option is to work with a professional accountant. To choose the right accounting software for your small business, read our buying guide.

Preparing a cash flow statement

Cash flow statements are indicative of your company's health. It shows that, at any given time, your company is a healthy business capable of continuing operation.

There are a lot of extensive breakdowns on cash flow statements. Below are some basic terms and elements of a cash flow statement you'll need to properly create and read yours.

For more information, some basic videos can provide concrete examples of cash flow statements and how to read them.

  • Cash from operating activities: This is how much money is flowing into your business. If this number is lower than net income, or it's a negative number, this could be a problem for your business.
  • Cash from investing activities: This should be a negative number. This includes money your business has used to invest in itself and its products. Buying supplies or further developing your product are two examples of this kind of activity. 
  • Cash from financing activities: This area demonstrates how much money your company is spending to pay off certain obligations. This can include things like dividends. 
  • Net change in cash: This is how much cash your company gains or loses based on the investing and financing activities. 
  • Net cash: Net cash can be highlighted as beginning and ending balance. The ending balance is determined by applying the net change in cash to the beginning balance. The ending balance shows how much cash you have on hand.

Editor's note: Looking for the right accounting software for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

How do you get positive cash flow?

Sales are obviously the best way for a business to gain cash flow. If you're not generating sales, you're not really a business. Of course, saving money in operational expenses helps too. It's important to have detailed budgets and to curb unnecessary spending.

What you should do if you have a cash flow deficit

In the event of a cash flow deficit, companies have a number of options, including the following:

  • Apply for a loan from a banking institution or individual.
  • Apply for a line of credit from a bank.
  • Speed up the collection process.
  • Finance the purchase of equipment through leasing or loans.
  • Liquidate assets.
  • Delay payments to vendors.

Sometimes, you may have a surplus of cash. That money can affect future opportunities, so you don't want it to sit around. Accountants recommend that you make the surplus work for you. You can do this by making short-term investments and using the money to pay off debts faster. That way, the money will benefit you through generated interest or shorter loan terms.

Tips for managing cash flow

If you have an accurate idea of your company's cash flow, there are some simple tips that can help you increase cash flow and manage your business.

  • Monitor your cash flow. The most important aspect of managing cash flow is to constantly be monitoring it. You need to know how much money your company is taking in, and you need to know how much of that money you have on hand to use. 
  • Cut costs. Do your best to tighten up where you can. If your company is losing money, this is a great first step to getting your business back on its feet. 
  • Delay payments to your vendors. Depending on who you're working with, you may be able to put off some payments to your vendors until your business is financially healthy. Do your best to maintain a healthy relationship and avoid late fees. 
  • Consider invoice financing. Invoice factoring and invoice financing are great ways to get advanced payment on outstanding invoices. It can help your company get the money it deserves earlier than a client is willing to pay. 
  • Consider loan options. Sometimes, all a company needs is a quick cash injection. Look at what line of credit, business loan and other financing options are out there. Remember, you should only be taking on debt if it's advantageous for your company. 

Some source interviews were conducted for a previous version of this article.

Image Credit: fizkes / Getty Images
Matt D'Angelo
Matt D'Angelo
Business News Daily Contributing Writer
I've worked for newspapers, magazines and various online platforms as both a writer and copy editor. Currently, I am a freelance writer living in NYC. I cover various small business topics, including technology, financing and marketing on and Business News Daily.