The Surprising Truth About Cash Flow
Here’s something that catches many business owners off guard: a profitable business can run out of cash. It sounds contradictory, but it happens all the time.
Imagine you land a big project worth $20,000. You hire subcontractors, buy materials, and pay for everything upfront. Your client’s invoice is on Net 60 terms. For two months, you’ve spent the money but haven’t received a cent. Your P&L shows a profit, but your bank account is empty.
That’s a cash flow problem.
What Is Cash Flow?
Cash flow is simply the movement of money in and out of your business. It’s tracked in a cash flow statement, which shows exactly where cash came from and where it went during a specific period.
The Three Types of Cash Flow
1. Operating Cash Flow
Cash generated from your day-to-day business activities:
Cash in:
- Payments received from clients
- Cash sales
Cash out:
- Paying suppliers and vendors
- Salaries and wages
- Rent, utilities, and other operating costs
- Taxes
This is the most important type. If your operating cash flow is consistently negative, your core business isn’t generating enough cash to sustain itself.
2. Investing Cash Flow
Cash spent on or received from long-term assets:
Cash out:
- Buying equipment
- Purchasing property
- Investing in another business
Cash in:
- Selling equipment
- Selling an investment
Negative investing cash flow isn’t necessarily bad — it often means you’re investing in growth.
3. Financing Cash Flow
Cash from funding activities:
Cash in:
- Taking out a loan
- Receiving investor funding
- Owner contributing capital
Cash out:
- Repaying loans
- Paying dividends
- Owner withdrawals
Managing Cash Flow Proactively
Invoice Promptly
The sooner you send an invoice, the sooner the payment clock starts. Don’t wait until the end of the month if you can invoice upon delivery.
Shorten Payment Terms
If you’re using Net 60 and experiencing cash crunches, consider moving to Net 30 or Net 15. Even moving a few clients to shorter terms can help.
Follow Up on Late Payments
Don’t let overdue invoices sit. A systematic follow-up process keeps cash flowing in.
Negotiate Better Supplier Terms
While you want clients to pay quickly, try to negotiate longer terms with your own suppliers. The gap between when you receive cash and when you pay it out is your cash flow sweet spot.
Build a Cash Buffer
Aim to keep enough cash on hand to cover 2-3 months of operating expenses. This cushion protects you from unexpected dips.
Watch for Seasonal Patterns
Many businesses have predictable busy and slow periods. If you know January is always slow, make sure you’re building up reserves in November and December.
The Cash Flow Forecast
One of the most useful things you can do is create a simple cash flow forecast — a projection of expected cash in and cash out over the next few weeks or months. It helps you spot potential shortfalls before they become emergencies.
In Fastbooks, your cash flow is tracked in real time. You can see at a glance how much cash you have, what’s coming in from outstanding invoices, and what’s going out in upcoming bills — helping you stay ahead instead of reacting to surprises.