The Seacoast BankNote

Understanding, Managing and Improving Business Cash Flows

Running a business is hard work — and that’s before you consider the challenge of managing the business’s financials. You might have a great product or service, but for your business to thrive in the long run, you need to turn a profit and generate positive cash flow. Cash flow problems can create a major headache for any business and are among the most common issues business owners face.

Every business owner should understand the basics of cash flow management and how to increase inflows while controlling outflows.

What is Cash Flow Management?

Cash flow refers to how much money comes into and goes out of a business over a specific period. It’s important to distinguish between cash flow and accrued revenue or expenses sincebusiness woman working at desk the former only includes money a company has on hand or has spent.

Cash flow management is how businesses track, manage and control the amount of money that comes in and out. Managing cash flow is a key component of running any business and includes overseeing every dollar that flows through the business. To successfully manage a business’s cash needs, you need to plan and prepare long before you’re in a cash crunch and identify which of the three types of cash flow is causing you problems.

Three Types Defined

1) Operating Activities

When you think of cash flow, a business’s operating activities are usually the first things that come to mind. Cash flow from operating activities includes how much money the business receives from selling products or services and how much money it spends on expenses such as rent, wages and insurance.

2) Investment Activities

Like an individual, a business can invest in mutual funds, stocks and other securities. Many companies also buy and sell other assets, like equipment, real estate or other companies. Cash flow from investment activities includes purchasing and selling these (and other) assets.

3) Financing Activities

Cash flow from debt, equity and dividends falls under financing activities. Say a publicly traded company wants to issue 100,000 shares of its stock for $100 per share. When the business issues the 100,000 shares, it will generate $10,000,000 cash flow. On the other hand, if the company takes out a loan for $2,000,000 or chooses to buy back $2,000,000 in stock, that would reduce its cash flow.

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How to Calculate Cash Flow

smiling couple looking at cash flowTo calculate net cash flow, subtract the cash outflow (the amount of money spent) from the cash inflow (the amount of funds received).

Here’s an example:

Beautiful Views Landscaping wants to calculate its quarterly cash flow. During the quarter, the company recorded $200,000 in cash inflows. After tallying up the costs of wages for its workers, insurance, equipment repairs and some miscellaneous expenses, the total cash outflows come to $125,000. In this case, Beautiful Views has a total cash flow of $75,000.

(Cash Inflow) $200,000 – $125,000 (Cash Outflow) = $75,000 (Total Cash Flow)

Why is Cash Flow Management Important?

Cash flow management is vital because it’s one of the keys to a successful business. Without cash on hand, it’s almost impossible for a company to stay afloat. Businesses need liquid cash to cover everyday expenses, like paying employees, suppliers and creditors. While you can buy some time by borrowing money or delaying payments, longer-lasting cash flow problems can spell disaster for businesses, particularly small and medium-sized enterprises.

Differences Between Cash Flow and Profit

Many businesses use cash flow and profit as success metrics; while the two are similar, it’s essential to recognize their differences. Cash flow represents all the money flowing into and out of the business; profit is left over when you subtract a business’s expenses from its revenue.

The critical difference between the two is that cash flow only includes money received or sent by the business, while profit can consist of revenue and expenses that haven’t yet been paid. For example, if you’re calculating profit, you might include accounts receivable. However, if you’re calculating cash flow, you wouldn’t use accounts receivable and other payments not yet received in your calculations.

How Much Cash Flow Should Businesses Have on Hand?

A good rule of thumb is to keep enough cash on hand to cover six months of business expenses to avoid cash flow problems and keep your business running smoothly. So, if your business costs $200,000 per year to operate, aim to have $100,000 cash on hand.

If saving enough cash to cover six months’ worth of business expenses isn’t possible, try to set aside enough cash to cover at least three months of operating expenses. Every business is unique, and every dollar you save can help secure your business. If you have a newer business, you might not have the cash flow to save that much yet, so try and save as much as possible in pursuit of saving enough cash to cover three to six months of operating expenses.

Cash Flow Calculator

A cash flow calculator can help you calculate your net cash flows and gain valuable insights into your business’s financials. These calculators tally up all your cash inflows and cash outflows by subtracting outflows from inflows, using inputs like:

Cash Inflows

  • Cash on hand (i.e., starting cash)
  • Sales of products, services, assets, equipment and more
  • Cash additions from issuing stock or bonds or taking out a business loan
  • Proceeds of interest payments made to the business from investments or issuing loans

Cash Outflows

  • Rent payments or real estate taxes
  • Loan repayments and interest payments
  • Payroll and other wages
  • Marketing and advertising expenses
  • Insurance costs
  • Dividends paid

Strategies for Managing Cash Flow

smiling business womanBefore implementing any cash management strategy, you must understand your current cash flows. Conducting analyses at regular intervals (e.g., monthly, quarterly or semiannually) can give you valuable insights about your business’s successes and challenges. After you conduct a formal analysis, you should be able to identify limitations affecting your cash flow (e.g., high accounts receivable).

How to Improve Cash Flow for Your Small Business

To improve business cash flow management, use these tips and best practices to increase cash inflows and limit cash outflows.

  • Reassess your budget and see which expenses you can cut back
  • Boost your business’s cash savings
  • Make it easier for customers to pay by offering flexible payment options
  • Automate invoicing
  • Use a net 15 or net 30 payment schedule (i.e., a company must pay their invoice in full 15 days or 30 days after receipt)
  • Optimize cash flow by forecasting future inflows and strategically planning outflows
  • Leverage technology to help you manage inventory
  • Negotiate with vendors to save money; explore alternative vendors to save
  • Hire an accountant to maximize your tax savings
  • Focus on steady, sustainable growth
  • Earn more with a high-interest business savings account
  • Leverage business loans and business lines of credit strategically
  • Refinance higher-interest debt


Cash flows are one of the most critical indicators of a business’s health, so managing them should be a top priority for every enterprise. Successful companies need ready access to cash to operate and survive long-term. Cash flows go beyond profits, which may not offer a complete picture of what’s happening inside the business. That’s why business cash flow management is essential, and companies should regularly examine their cash flow statement to maximize inflows and minimize outflows.

Whatever stage your business is in, Seacoast Bank has the small business banking products you need to manage your cash flows — and the local community presence you know and expect. Fill out the form below to speak to an advisor about how Seacoast can help you manage and grow your business.

Topics: Financing


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