Cash flow 101: What is it and how to manage it

Cash is the lifeblood of any business. The truth is that no matter how much profit you’re making on paper, without enough cash on hand to cover your day-to-day expenses, your business can quickly run into trouble. This is where cash flow management comes in—to help you pay your bills, invest in growth, and handle any surprises that come your way.

What is cash flow?

Cash flow refers to the money flowing in and out of your business—the inflows (like sales revenue and investment income) and outflows (such as rent and wages). It determines your ability to cover different costs and pay suppliers, employees, and lenders.

Positive cash flow means you have more money coming in than going out, which is what you're always working towards. It indicates financial stability, allowing you to reinvest in your business while maintaining enough reserves to cover operating expenses.

Negative cash flow, on the other hand, is when you're spending more than you're bringing in. Although it may sound alarming, negative cash flow isn't always bad. In some cases, it's normal—for example, if you've just started your business or have made a significant investment in growth.

However, chronic negative cash flow that lasts for months or years is a sign that something isn't right. Perhaps you're not selling enough, your expenses are too high, or your operations aren't as efficient as they could be. Whatever it may be, it's important to investigate the culprit of your cash flow issues and adjust your strategy.

Cash flow vs profit: What's the difference?

The terms 'cash flow' and 'profit' are often used interchangeably, and although closely related, they mean different things. As explained above, cash flow is the movement of money going in and out of your business, representing the cash you have on hand to cover business expenses.

Profit, however, refers to the money that's left from your sales revenue after costs have been subtracted. It’s what’s left over on paper—even if you haven’t actually received the cash yet.

So, let's say you sell $500 worth of products or services today, but your customers won't pay you for another 15 days. Your profit for the day is $500, but your cash flow won't move until you actually receive payment.

While profit shows short-term success, cash flow provides you with a better picture of long-term financial health. A business can be profitable yet still struggle with cash flow—for example, if it has delayed payments and can’t cover immediate expenses.

Cash flow management tips

Managing your cash flow is key to keeping your business financially healthy, stable, and ready for both challenges and opportunities [1].

Understand your cash flow

To stay in control of your cash, you first need to understand how it moves through your business —not just what’s in your bank account today, but what’s coming in and going out over time. This means adding two items to your to-do list, if they're not there already:

• Cash flow statements. This is one of your core financial documents and it provides you with a historical record of how cash enters and exits your business over a specific period.
• Cash flow forecasting. This is a projection of your expected inflow and outflow for a certain period, typically a month or a quarter. Forecasting will help you prepare ahead of time by anticipating any shortages or surpluses.
• Cash flow analysis. Forecasts are never 100% accurate, which is why regularly analysing your actual cash flow is so important. It allows you to compare your expectations versus reality and adjust your strategy accordingly. Plus, it provides you with valuable insights for more accurate forecasts in the future.

Invoice as soon as you can

Your invoicing strategy can have a major impact on your cash flow, because the longer you have to wait for payment, the more strain you'll feel on your available cash to cover day-to-day expenses.

By getting into the habit of sending out invoices as soon as you can, you're giving your clients ample time to pay their bills, which is a great starting point. If you're dealing with late-paying clients, slashing a percentage off their total bill can be an enticing incentive (just make sure it's not such a big discount that it ends up hurting profitability). It's also smart to send out a reminder via email or text a few days before the invoice is due.

Another solution to ease cash flow pressure is invoice finance, which allows you to access cash from unpaid invoices quickly, using accounts receivable as collateral. If this sounds like the right course of action for your business, we can help.

Our platform compares loans from over 90 lenders to connect you with ones that work with your unique needs. We manage the paperwork, handle the application, and help get your funding sorted—so you can stay focused on growing your business. Reach out today.

Cut unnecessary expenses

When was the last time you thoroughly reviewed your expenses? Many businesses have hidden or overlooked costs that slowly but surely drain their cash without adding real value. Whether it's unused subscriptions, unnecessary travel, or excessive entertainment bills, if you're spending money on things that no longer serve your current needs, it's time to cut back.

Instead, be intentional about where your money goes, save where you can, and make sure each dollar you spend is working for your business—not holding it back.

Manage inventory efficiently

Having too much inventory ties up working capital that could be used elsewhere. On the flip side, having too little may lead to lost sales or delayed deliveries. The secret is in finding just the right balance, keeping enough inventory to meet customer demand without letting excess stock sit unused in storage.

By monitoring sales trends, forecasting, and adjusting your ordering processes, you can free up cash, reduce waste, and keep your cash flow healthy.

Build a cash reserve

In other words, regularly put aside a portion of your profits to use in case of an emergency, slow period, or unexpected expenses. Having this contingency means you don't have to eat away at your operating cash when challenges arise.

It gives you a safety net so you can navigate tough times (or jump on new opportunities) while keeping your day-to-day cash flow healthy and your business running smoothly.

Ready to strengthen your cash position? Whether you need working capital, invoice finance, or another type of business loan, we can help you find the right funding solution. Get a quote today.

References:

1. Guide to managing cash flow | business.gov.au