What is Cash Flow in Simple Terms?

Cash flow is simply all the money that flows in and out of your business during a specific time period. It’s like keeping track of how much money you have available to pay your bills and grow your company.

Core Concepts:

Positive Cash Flow When more money comes in than goes out. Your business is generating enough cash to cover expenses and have surplus.

Negative Cash Flow When more money goes out than comes in. This can be normal at startup, but it’s dangerous if it continues long-term.

Zero Cash Flow When exactly the same amount comes in as goes out. You cover expenses but have no growth.

The Three Types of Cash Flow You Must Know

1. Operating Cash Flow

This is money from your business’s daily operations:

• Money In: Product or service sales, customer payments
• Money Out: Materials, wages, rent, utilities, insurance

Example: A bakery that sells $5,000 worth of bread monthly but spends $4,000 on ingredients, rent, and wages has a positive operating cash flow of $1,000.

2. Investment Cash Flow

Money related to major purchases to grow your business:

• Money Out: Equipment, vehicles, technology, property purchases
• Money In: Sale of assets you no longer need

Example: Purchasing a $10,000 machine to increase production.

3. Financing Cash Flow

Money that comes from external sources or is returned to them:

• Money In: Loans, investments, money you contribute
• Money Out: Loan payments, interest, money you withdraw

Example: Obtaining a $20,000 loan for startup capital.

Cash Flow vs. Profit: The Difference That Confuses Many

A Costly Mistake

Many entrepreneurs confuse being profitable with having available cash. You can have profits on paper but no money in the bank.

Real-World Example: Consulting Business

Imagine you have a consulting company:

• You sign a $5,000 contract
• Your costs are $2,000 (profit of $3,000)
• The client will pay in 90 days
• But you need to pay rent and salaries TODAY

Result: You have profit on paper but negative cash flow in reality.

Why This Matters

You can’t pay rent with future profits. You need real cash to:

• Pay employees
• Cover operating expenses
• Purchase inventory
• Seize opportunities

Accounts Receivable

Money that customers owe you for products or services already delivered.

• Example: You sold $1,000 in products but the customer will pay in 30 days

Accounts Payable

Money you owe suppliers for products or services received.

• Example: You received $500 worth of materials but will pay in 15 days

Working Capital

The money you have available for daily business operations.

• Simple formula: Cash in bank + Accounts receivable – Accounts payable

Break-Even Point

The moment when your income exactly equals your total expenses.Means: You neither make nor lose money, you just cover costs

Essential Financial Statements You Need

1. Cash Flow Statement

A report showing all money that flowed in and out during a specific period.

What it includes:

• Money from daily operations
• Money from investments
• Money from financing
• Total cash at period end

2. Income Statement (Profit & Loss)

Shows whether your business is making or losing money.

• Total Revenue – Total Expenses = Profit or Loss

3. Balance Sheet

A “snapshot” of everything you own vs. everything you owe at a specific moment.

• Assets (what you own) – Liabilities (what you owe) = Equity

How to Create Your First Cash Flow Forecast

Step 1: List Your Money Sources

• Projected sales month by month
• Other income (rent, interest, etc.)
• Planned loans or investments

Step 2: List All Your Expenses

Step 3: Create Your Monthly Projection

Step 4: Monitor and Adjust

Compare actual vs. projected each month and adjust your estimates.

Mistake #1: Not Separating Personal and Business Money

Problem: Mixing bank accounts confuses real cash flow.

Solution: Open a bank account exclusively for the business.

Mistake #2: Not Planning for Taxes

Problem: Taxes arrive as a “surprise” that empties the account.

Solution: Reserve 20-25% of your profits for taxes.

Mistake #3: Giving Credit Without Control

Problem: You sold a lot but have no cash because customers haven’t paid.

Solution: Establish clear payment policies and follow up on accounts receivable.

Mistake #4: Buying Too Much Inventory

Problem: Your money is “trapped” in products that don’t sell quickly.

Solution: Buy only what’s needed for 1-2 months of sales initially.

Simple Strategies to Improve Your Cash Flow

Accelerate Money Coming In

• Invoice immediately after delivering product/service
• Offer discounts for cash payments (e.g., 2% if paid within 5 days)
• Request deposits for large projects
• Use multiple payment methods (cards, transfers, apps)

Control Money Going Out

• Negotiate payment terms with suppliers (ask for 30 days instead of 15)
• Compare prices before each major purchase
• Avoid unnecessary expenses especially in the first months
• Consider leasing instead of buying expensive equipment

Create a Safety Cushion

• Multiple income sources: Don’t depend on one large client
• Emergency reserve: 3-6 months of operating expenses
• Line of credit: Establish it BEFORE you need it

Basic Tools for Entrepreneurs

Basic Accounting Software

• Wave: Free for small entrepreneurs
• QuickBooks Simple Start: Easy to use
• Xero: Good bank integration

Invoicing Apps

• PayPal Invoicing: Free, easy integration
• Square Invoices: Free, good for services
• FreshBooks: For freelancers

Forecasting Tools

• Excel or Google Sheets: Free, templates available
• Float: Specialized in cash flow
• LivePlan: For complete business plans

Simple Indicators to Monitor Your Business

Collection Days

How long does it take to collect after a sale?

• Goal: Less than 30 days
• Calculation: (Accounts receivable ÷ Average daily sales)

Inventory Turnover

How quickly do you sell your inventory?

• Goal: Sell all inventory every 1-2 months
• Warning sign: Products that don’t move for 3+ months

Liquidity Ratio

Can you pay your immediate bills?

• Calculation: (Cash + Accounts receivable) ÷ Accounts payable
• Goal: Have at least $1.50 available for every $1.00 you owe

When to Seek Professional Help

Signs You Need an Expert:

• Negative cash flow for more than 3 months
• You don’t understand your financial reports
• Planning to apply for a significant loan
• Your business is growing very fast
• You have tax problems

Types of Help Available:

• Accountant: To keep books and prepare taxes
• CFO Consultant: For financial strategy
• SCORE: Free mentors for small businesses
• SBA: Free resources and training

Week 1: Fundamentals

• [ ] Open a bank account exclusively for the business
• [ ] Download a basic accounting app
• [ ] Make a list of all your projected expenses

Week 2: Projection

• [ ] Calculate how much you need to sell to cover expenses
• [ ] Create your first 6-month cash flow forecast
• [ ] Identify your 3 largest expenses

Week 3: Systems

• [ ] Set up an invoicing system
• [ ] Establish payment policies for customers
• [ ] Open a savings account for emergency reserves

Week 4: Monitoring

• [ ] Schedule weekly 30-minute reviews
• [ ] Review your actual vs. projected cash flow
• [ ] Adjust your estimates based on real data

Water = Your Money

• Water level: How much cash you have available
• Water flowing in: Sales, collections, loans
• Water flowing out: All your expenses

The Tank’s Outlet Valves

Fixed Valves (You Can’t Close Them)

These expenses flow out automatically each month, whether you like it or not:

• Property rent
• Required insurance
• Fixed salaries
• Basic services (internet, phone)
• Loan payments

In the tank: These are like valves that are permanently connected and always open.

Variable Valves (You Control Them)

These expenses you can adjust based on the situation:

• Inventory purchases
• Marketing and advertising
• Employee overtime
• Non-essential equipment
• Business travel

In the tank: These are valves you can open wider, close, or even shut completely.

Tank Alert Levels

Green Zone (Tank 60-100% full)

• Your business is healthy
• You can invest in growth
• Time to build reserves

Yellow Zone (Tank 25-59% full)

• Attention! Review non-essential expenses
• Speed up customer collections
• Prepare to adjust variable expenses

Red Zone (Tank 10-24% full)

• EMERGENCY: Immediate action required
• Close variable valves NOW
• Collect all outstanding accounts TODAY
• Consider using reserves or line of credit

Critical Zone (Tank 0-9% full)

• Evaluate business viability
• Tank is almost empty
• Seek emergency financing

Weekly Tank Review (15 minutes)

• Check the level: How much cash do you have?
• Review inflows: What money do you expect this week?
• Plan outflows: What payments do you have scheduled?
• Adjust if necessary: Do you need to close any variable valves?

Questions You Should Ask Yourself

• What zone is my tank in today?
• Which variable valves can I adjust if necessary?
• Do I have enough water for the next 30 days?
• What would happen if a large client doesn’t pay on time?