How cash flows in and out of your business is a lynchpin for understanding business finance. There is a vast difference between making money and managing it. So often, entrepreneurs start a business because they love creating a new widget or offering a leading-edge service, but unfortunately, some have little to no business management experience. Forecasting, budgeting, and cash flow only work if you can cover your monthly bills and payroll. To avoid having a cash flow problem, learn the basics of how profits and cash flow operate.


Lesson #1 Profit and Cash Flow are Different


Profit is revenue minus expenses. That means any money left over after all the bills are paid considered profit. Conversely, cash flow refers to the cash in and out of your business. For example, if you go to the store to buy milk without money, you have a cash flow problem. Even if you anticipate the money from a sale in 30 days, you still need cash to purchase the milk now. 


Even if your business sells more products or services, you still need to increase your cash flow. More often than not, the increased sales will immediately reduce your cash flow. 


Now you’re thinking, if sales help to generate revenue, why wouldn’t I want more sales? Sales, primarily when products are concerned, will require an immediate cash outlay to manufacture, package, and distribute the item(s). These steps must occur well before delivery and invoicing, and another ten to 45 days or more can go by before the company is paid for the products. That timeframe between your product’s production and the payment for your product is where cash flow management lives.


Lesson #2 – Look at your options.


Much like a synchronized swimming routine, precise cash flow management must occur in a timely, well-choreographed dance to keep the business operating, expenses covered, and employees paid. Part of this monetary routine can include:



Where are your current account receivables? Are they current or in arrears, and if so, by how much? By placing your attention on existing receivables and making efforts to encourage payments, cash flow will be improved. For invoices, over 90 days past due, consider a collection agency or some other type of arrangement.


Delaying cash payments 

Review how your orders are placed for materials with vendors. Can you set contracts for orders where a percentage is paid up front and the remaining balance paid in 15 or 30 days? This will improve cash flow as it will remain in-house longer.


Raising Additional Capital 

If you cannot meet your financial obligations within the necessary time, you may need to solicit additional cash through loans, issuing capital stock, employee ownership, or other arrangements. Again, planning and attention to cash flow can help with strategic timing, more attractive interest rates, and loan agreements. Covering debts in a crisis mode will inevitably mean less attractive interest payments and possibly selling more ownership than initially intended.


Lesson #3 Too much competition can kill revenue.


The one thing that makes capitalism work is competition, yet competition can be the very thing that can take a business under the quickest. How? When companies are constantly bidding for business and trying to shave off profit margins to win the contract, those pennies, nickels, and dollars can all add up to no actual profit. Yes, the business has lots of flowing in, but only a little staying in its bank accounts. Try to be brutally honest with yourself and your bidding so that you know up-front if your business can afford to reduce costs or even a loss to gain business. Make sure you are working from actual numbers and in partnership with your finance team to plan for losses on one contract and profits on another.


There are many books and webinars on cash flow and cash management. If you don’t have that time, Estess CPAs are here to help. We specialize in assisting businesses to save time and money. Besides providing bookkeeping, payroll, and accounting services, we are here to advise you and help you succeed. Call us today and schedule an appointment at our Belle Chasse or Luling offices:


7822 Highway 23 128 Lakewood Drive

Belle Chasse, LA 70037 Luling, LA 70070

(504) 433-5122 (985) 785-1470