Cash flow

by Admin
Updated: August 10, 2020

Cash flow projections are one of the most important tools for good business management

Businesses (and individuals) succeed or fail according to their cash flow. When you are required to settle a financial obligation (pay a bill) you must have the means to be able to do so. A lot can be achieved using credit but it is never unlimited and at some point real funds have to be produced. Cash needs to flow in before it can flow out.

Juggling lines of credit can be an effective way of sustaining trade but some payments have to be made directly from the bank and when this happens there needs to be enough in the bank!

Cash flow is simply the money coming in minus the money going out. It can be positive or negative. It is not the same as profit:

  1. Cost $1,000, sell for $1,200 = 20% profit. Get paid before paying suppliers = $1,200 positive cash flow.
  2. Cost $1,000, sell for $1,200 = 20% profit. Pay suppliers before getting paid = $1,000 negative cash flow.
  3. Cost $1,000, sell for $900 = 10% loss. Get paid before paying suppliers = $900 positive cash flow.
  4. Cost $1,000, sell for $900 = 10% loss. Pay suppliers before getting paid = $1,000 negative cash flow.

In scenario #2, the business is just as profitable as in scenario #1 but, unless the business has - or can borrow - at least $1,000, it won’t be able to pay its costs.

Although losing money in the simplistic way of this example is not sustainable, a competing business that has negotiated favorable terms for its costs could use scenario #3 temporarily to force the first business out of the market.

Suppose the first business doesn’t get paid until the third month and the second business doesn’t pay its suppliers until the third month:

Business 1Business 2
Month 1
Pay suppliers:-10000
Get paid:0900
Bank balance:-1000900
Month 2
Pay suppliers:-10000
Get paid:0900
Bank balance:-20001800
Month 3
Pay suppliers:-1000-1000
Get paid:1200900
Bank balance:-18001700

Even though it made a loss for the first three months, if Business 2 puts its prices up to become profitable in month 4 its cash position will continue to improve. On the other hand, even if Business 1 doesn’t get into trouble in month 3, the effects of the negative cash flow from its first two months of trading will linger for at least (subject to interest) another 10 months.

Good management will anticipate and protect against this.


Given that Month 1, 2 etc. are in the future, we are talking about cash flow projections. As such they are important tools which tell us if we have enough cash to survive and do well. In our example, we can clearly see that Business 1 should not start trading unless it has at least $1,000 on hand (I would say at least $2,000).

In my experience, most businesses usually get the projections of their expenses about right but startups typically overestimate their income. As a rule, if your business is a startup, cut your anticipated income in half and make sure you still have enough cash to keep you afloat under those circumstances. It’s much easier to get money when you don’t need it.

Established businesses will use historical data to validate projections and must be careful to avoid complacency.

There are two main ways of calculating cash flow using a spreadsheet - the detailed running total and the periodic layout.

Detailed running cash flow

This uses three primary columns - description, amount and running total - with one transaction per row. It is most useful when the available cash is low compared to the possible expenses.

A simple working example can be found in the Spreadsheets article.

Enhancements include adding columns for date and transaction types and splitting the amount column into in & out columns to avoid having to input expenses as negative numbers.

Periodic cash flow

It is normal for the period to be one month but other periodicities such as weekly or 4-weekly may be more appropriate depending on the nature of the business. The annual accounts will normally show a summary for the year.

A cash flow analysis of this type will have categories listed vertically and columns for periods horizontally. It is most useful when there are a lot of individual transactions and their order within the chosen period is not critical.*

Here is an ultra-simple example of a monthly cash flow analysis:

Bank b/f1000060003500250030005000
Cash flow-4000-2500-100050020003500
Bank c/f600035002500300050008500

Note that the Bank figure at the bottom is carried forward to the Bank figure at the top of the next month (the Bank “brought forward” figure).

* Expenses going out before income is received within any period is always a potential problem with this layout, e.g. Rent is due on the 1st but sales receipts are spread across the whole month.


Reconciliation refers to replacing the predicted numbers in the cash flow projection with the actual numbers. The Bank amount in the spreadsheet should then agree exactly with the actual bank balance.

Although it makes for a slightly more complicated spreadsheet, I recommend preserving the projected figures so you can be reminded of any miscalculations going forward.

More info

“Everything You Need to Know About Being Cash Flow Positive” at

“Cash Flow Statement​” at

“How To Manage Cash Flow In Small Business” at

CASHFLOW® - the game, at

Internal links

Spreadsheets Profit Financial reconciliation Project planning All articles
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