Handbook / Bookkeeping and cash

Cash flow for small businesses: how to track, forecast and improve it

Many small businesses that struggle are not unprofitable; they simply run out of cash at the wrong moment. Clients pay late, a big bill arrives, tax is due and the account runs dry. Managing cash flow means knowing when money will arrive and leave, and acting before a gap becomes a crisis.

Cash flow vs profit

Profit is your income minus expenses for a period, shown on a profit and loss statement. Cash flow is when money actually moves into and out of your bank account.

They differ because of timing:

• you invoice in one month but are paid in the next
• you buy materials before the job pays
• annual insurance or software is paid in one lump
• tax payments come due on set dates
• equipment purchases use cash all at once, even if deducted differently for tax

Under the accrual method, income can be recorded before cash arrives; IRS Publication 538 explains cash and accrual methods. See cash vs accrual.

Track actual cash

Each month, record:

• opening bank balance
• cash received, by source
• cash paid out, by category
• closing balance

If you reconcile your bank statement monthly, you already have accurate cash figures.

Build a simple forecast

A cash flow forecast looks ahead, usually three to twelve months. For each month, list:

• expected cash in: invoices due, confirmed work, regular retainers, realistic new sales
• expected cash out: rent, software, insurance, supplies, loan payments, owner's pay, tax payments
• net cash flow: in minus out
• projected balance: last month's balance plus net cash flow

Be cautious: count income only when you expect to receive it, not when you invoice. Update the forecast monthly. A spreadsheet is enough.

Watch for warning signs

• projected balance falling below your comfort level
• rising overdue invoices
• one client making up a large share of income
• relying on credit cards to cover regular costs
• tax payments arriving with no money set aside

Speed up cash coming in

• invoice immediately after finishing work; see how to invoice
• set clear payment terms
• take deposits on new or custom work
• use progress billing for long projects
• accept convenient payment methods; see ACH payments and card payments
• follow up overdue invoices promptly with a payment reminder email
• add recurring revenue, such as retainers

Manage cash going out

• schedule large purchases for months with stronger cash
• pay bills on their due dates rather than early, unless there is a discount
• review subscriptions and cancel unused ones
• ask suppliers about payment terms
• consider leasing or spreading costs for expensive equipment

Plan for tax

Self-employed people usually pay estimated taxes during the year. The IRS explains that estimated tax is the method used to pay tax on income not subject to withholding, generally in quarterly payments. Put tax savings in a separate account so estimated payments do not drain your operating cash. See how much to set aside.

Build a cash reserve

A reserve covers slow months, late payers and surprises. Build it gradually by setting aside a share of each payment. The right size depends on your costs and how much your income varies. See irregular income budget.

When a shortfall is coming

If the forecast shows a gap:

• chase overdue invoices first
• offer clients a reason to pay sooner, such as a small early-payment discount
• delay non-essential spending
• talk to suppliers about timing before bills are due
• reduce your owner's draw temporarily; see pay yourself
• consider financing, such as a line of credit, only for a genuine timing gap; the SBA explains financing options

Review monthly

Set a monthly money date: reconcile accounts, update the forecast, review overdue invoices and decide on owner's pay. Small, regular reviews prevent most cash crises.

Seasonal businesses

If your income follows the seasons, such as lawn care, tutoring or holiday gifts, your forecast matters even more. Map the months when income peaks and dips, and set aside part of each strong month's cash for the quiet months ahead. Plan large purchases, marketing pushes and time off around this pattern instead of reacting when money runs short.

Track the cash you actually receive and pay, forecast several months ahead, invoice promptly with deposits and clear terms, control spending timing, save for tax separately, build a reserve and act early when the forecast shows a gap.