The ins and outs of cash flow: How to keep track of the money moving through your business

Tracking money in and out of your business may seem simple, but it can become complicated. A company’s cash flow helps to evaluate its overall financial health. Knowing how cash flow affects your business can be just as important as finding the right management strategy.

In a 2019 study, Intuit found that most small business owners struggle with cash flow. Nearly one third struggled to the point that they couldn’t pay bills. Almost 70% of small business owners claimed that worries about cash flow had kept them up at night.

It’s no secret that cash flow is vital to a business. On the surface, it seems simple. It’s just the net amount of cash moving in and out of a company. But things can get complicated when you begin to track the different types of cash flows and prepare cash flow statements for your business. 

3 types of cash flow

Cash flow is divided into three different types. These types help business owners to track how that money affects their business and the overall health of their company. If you can accurately project your cash flow, you can make sound decisions for your company’s future and create an overall business strategy.

Remember, cash flow isn’t the same as profit. Profit is a measure of financial success instead of overall financial health. The amount remains after all of your business expenses are subtracted from revenue. 

With that said, profit and cash flow do not always match. While a business can be profitable, it may struggle to pay bills and invest in growth. Some startups have positive cash flows but don’t turn a profit.

Cash flow from operations

This may be the most familiar form of cash flow. Cash flow from operations (CFO), or operating cash flow, is the money that comes into your business from sales of your products or fees for services you provide. Expenses like employee salaries, taxes, and purchased inventory are subtracted from this revenue. 

The bottom line is that operating cash flow indicates if a business has enough money coming in to cover its bills.

Cash flow from investing

Investing cash flow can refer to investments your company makes in securities, like stocks or bonds. It can also refer to investments in equipment, property, or other assets needed to run your business. 

Inflows and outflows of this money are calculated by the purchasing and selling of these assets. But cash flow from investing (CFI) can be tricky to evaluate. For example, businesses can have money tied up in activities like research and development for years.

Cash flow from financing

You must account for financing cash flow if investors or loans fund your business. Inflow is created by taking on debt or investments to finance your business. Outflow is the dividends paid to investors or payments you make on loans. Cash flow from financing (CFF) is generally used to show investors how your company’s capital is managed.  

Find the best way to track cash flow for your business

Managing your cash flow can give your business a major boost toward success. The trick is finding a solution that works for you, your busy schedule, and your company’s structure. 

Effective DIY bookkeeping strategies mean keeping track of every aspect of your business’s money. Luckily, collecting, sorting, and recording all of your financial transactions doesn’t have to be as tedious as it sounds. There are several strategies you can consider when it comes to your bookkeeping. 

Bookkeeping by hand

When you need a simple means to record transactions and track the balances of accounts, a general ledger may be a good option. In fact, a general ledger can help build larger financial statements that give insight into overall cash flow and income. This method has a few other advantages:

• It’s less expensive than software or hiring a bookkeeper
• Transactions are logged simply with basic information, date, journal entry, and either a credit or debit
• It’s a versatile method that can be logged on paper or on a computer spreadsheet
• The process of separating business and personal records can be more accurate than relying on automated filters.

There are also some disadvantages to this method of bookkeeping, especially because transactions are logged by hand:

• Tracking, calculating, and updating different aspects of each type of cash flow and your company’s overall cash flow can be tedious. You’ll use formulas for free cash flow, operating cash flow, and the cash flow forecast. Even with spreadsheets like Excel, errors in entries or formulas can lead to major problems down the line.
• Manually logging entries can leave the overall ledger more prone to errors due to forgetting to log entries or mathematical mistakes.
• The process is often more time-consuming. If your business doesn’t have the resources or expertise to track finances by hand, this option just ultimately may not work for you. 

Accounting software for small businesses

Many small business owners turn to accounting software solutions. This option allows them to save time and money and provides a real-time view of their company’s financial health. 

Automation options for accounting platforms are always improving. In recent years, many software options have allowed bank and credit card integrations that automatically track your transactions. Some platforms can intuitively categorize expenses based on vendor, and most options will allow you to store digitized receipts to account for every expense.

Different platforms offer different advantages and specific insights into your business. The right solution for you will depend on your needs and budget. 

• QuickBooks is a popular platform that offers various plans to suit a multitude of business types and sizes. Services include everything from tracking cash flow and projecting profitability to generating invoices and creating reports. Software like QuickBooks can help small business owners keep an eye on cash flow and still have time to focus on their business.
• Wave is a great platform for small business owners who need simple functions to track cash flow. While features may not be as robust as those offered by QuickBooks, all the basics are covered, and you can start using the user-friendly platform for free. 
• ComplYant takes the stress out of business tax. Taxes, license filing, and overall compliance are inevitable in running a business. Luckily, this platform allows small business owners to create a free account and manage this important aspect of their overall cash flow. After all, missing a tax or filing deadline can lead to penalties. Those penalties can mean the difference between a negative and positive cash flow, especially for new or scaling businesses.

Take charge of your cash flow

If your business is turning a profit and you don’t owe money to lenders, it can be easy to wonder why tracking cash flow is so important. No matter your circumstances as a business owner, knowing the state of your cash flow gives you valuable insight into the overall health of your business. 

Cash flow can help you see warning signs early so you can make changes. On the other hand, you can also find potential areas for growth. Keeping a close eye on your cash flow helps you think strategically and can be part of your overall best practices for running your business.

• Watching your cash flow closely can help you know when to borrow money. It’s easier to open a line of credit or apply for a business credit card before you get into trouble. If your business is already in trouble, seeing the sign earlier than later can help you restructure or refinance debt to manage tough times.
• Finding areas for growth or optimization can help your company’s bottom line. When you track your cash flow, you can spot issues like excess shipping costs, unpaid invoices, and unsold inventory where you have the potential to save money.  
• Having an overall picture of your cash flow can also help you make strategic decisions about investments. Knowing if it’s better to rent or buy a piece of equipment for your business can significantly impact your business's financial future, particularly in its early days when profit margins are often very thin. 

Find what works and be consistent

You should be consistent whether you track cash flow by hand or with bookkeeping software. Developing a system that works for you can give your business a strong foundation for success. Simplifying the process can help you focus on growing your business. 

Managing your small business is a lot of work, but there are many tools to help. Find your best practices, evaluate your business strategy regularly, and learn more from webinars like ComplYant’s 9 Tax Things Small Business Owners Need to Know.