What Is Cash Flow Management + Template and Examples (2023) - Shopify (2024)

Improving cash flow is a smart move for any business. It doesn’t matter how great your business model is, how profitable you are, or how many investors you have lined up. If you’re looking for one area to focus on to make a dramatic impact on your business, this is it.

New and growing businesses often don’t have a buffer of extra cash to get them through shortfalls, because they’re always reinvesting. Years with the most significant growth—including the first few years of a business’s lifespan—are also challenging when it comes to cash flow.

Cash flow management is one of many reasons it’s so hard to get a new business off the ground.

What is cash flow management?

Cash flow management is the process of monitoring, analyzing, and optimizing the inflow and outflow of cash within a business. It involves ensuring that a company has sufficient funds available to meet its financial obligations, such as paying bills, salaries, and loan repayments.

Cash inflow is the money coming to a business—this includes sales, interest earned on investments, and any credits paid to the company. Cash outflow is the money going out of a business. For example, expenses like website maintenance and hosting, inventory purchasing, rent, shipping fees, and more. A cash flow statement records these inflows and outflows so you can see it all at a glance and dive deeper where needed.

To calculate cash flow, a business takes note of how much cash is available at the beginning and at the end of a specific period. This time period may be a week or a month. The business will have a positive cash flow if there’s more in the account at the end of the period than when the period began; it will have a negative cash flow if there’s less cash at the end.

Getting good at cash flow management is one of the best things you can do for your business. Not only that, it’s a skill you can carry over into other ventures, as well as your personal finances.

The difference between cash flow and profitability

Cash flow isn’t the same as profitability. Cash flow is shown on the cash flow statement, whereas profit is shown on the income statement, or profit and loss (P&L) statement.

Learn more: What Does It Really Cost to Start a Business?

A profitable business can still be unable to pay its bills. Similarly, just because a business is meeting all of its financial obligations doesn’t mean it’s profitable. You may be profitable over the course of a month or a year, but not over a specific day or week. If your bills are due at the beginning of the month but you won’t have any money in the bank until the end of the month, you’ve got a cash flow problem, even if at the end of the month you made more than you spent.

If you’re not profitable on paper, you need to either increase your revenue or decrease your expenses to be able to stay in business.

In relation to small business cash flow management, the problem with income statements is that they don’t show your whole business. A few essential pieces of information are missing:

Debt repayment

If you have any business loans or other startup capital to repay, it won’t show up here. Only the interest on those loans is included on a P&L, even though debt repayments can eat up a lot of cash.

Equipment payments

Similarly, if you make a significant equipment purchase, the entire cost will not show up in this section. Instead, that cost will get spread out over the lifetime of the equipment. If you spend $100,000 on a canning line and you think it will last you 10 years, your income statement will show an expense of $10,000 per year for 10 years, even if you had to pay all of it upfront.

Taxes

Note that your net profit isn’t taxed at this point, which means it will shrink even more. Even if all of your profit is available in cash, you won’t be able to spend it all in one place.

Cash received

Many businesses use accrual accounting, which records revenue even if you haven’t received the money yet. On paper, you might have $200,000 in sales, but if no one has paid you yet, you’re still going to have a hard time paying your bills.

Further, if you carry inventory, all that product has value and gets included on your income statement as well. Of course, to extract cash from your inventory, you need to sell it first.

The four steps of cash flow management

The best way to keep control of your money is with cash flow statements. In small business cash management, a cash flow statement is an account of the cash flowing into and out of a business over an accounting period, such as a month, quarter, or year, although you can track cash flow for any time period that helps you see where your money is going. Try this out in Shopify’s cash flow calculator.

Most businesses work best by planning week to week. However, some may need to plan daily, while others only need to plan monthly. It’s also up to you if you want to include every single expense or just categories of expenses. These decisions will depend on the scale and complexity of your business.

Similarly, some businesses will be able to project their cash flow accurately for six months, others for only two weeks. In general, try to project four to six weeks with reasonable accuracy. A good rule of thumb for small business cash flow management is the farther you look into the future, the less accurate your predictions will be.

Now let’s get into the steps of cash flow management. You can use this free cash flow template to follow along. Just make a copy to your own Google Drive.

Step 1: Forecast expenses

The first step is to lay out all of your ongoing financial obligations. Start by making a list of everything you have to pay for—rent, salary, advertisem*nts, software fees, loan repayments—anything that comes out of your bottom line.

Write down what the expense is for, how much it is, and when it’s due. You’ll likely forget a few things, so review your bank and credit card statements to see what other expenses you find.

Step 2: Forecast revenue

Next, it’s time to forecast your weekly revenue. Many businesses experience fluctuations in sales, so it can be a bit of an art. Try to be as accurate as possible. The more established your business becomes, the easier it will be.

Start by writing down any guaranteed revenue. If you sell subscriptions or have long-term contracts, you’ll have a good idea of what’s coming up. You can estimate if those numbers are going to go up, down, or stay the same. If a large portion of your sales come from first-time customers, it will be more difficult to estimate. Still, you should have a good idea of what to expect over the coming weeks and months. The closer you can get to reality, the better.

One best practice in small business cash management is looking at past data to assist projections. In many cases, your sales from this week one year ago will be more accurate than your sales last week, because historical data takes annual cycles and seasonality into account. If you believe your sales will grow over last year’s, you can increase the amount, but it’s important to be conservative to avoid ending up in a bad situation.

As you forecast revenue each week, be mindful of any dips in sales due to holidays or the time of month or year, as well as any promotions or major deals that will positively impact your revenue.

Step 3: Plug in your data

Now comes the fun part—filling in your data. First, grab your free copy of the cash flow projection template. You can customize a row for each expense and each revenue source—be as detailed or broad as you need to be.

Take a look at this business cash flow management example below.

If you sell a bunch of products on one website, you may only have one source of revenue. If you use multiple channels, such as web, retail, and trade shows, you might want to have a line for each, because it will be easier to predict.

Make sure you add revenue to the week it will become available to you. Keep in mind that it may take a few days to end up in your bank account.

Similarly, fill in your expenses. Some will be weekly, some bi-weekly, some monthly, some variable. You’re also going to have a lot of miscellaneous expenses popping up. Use the row labeled “Other” to work these into the spreadsheet.

Add your opening cash balance for the first week. The following weeks will be predicted automatically based on your revenue and expense projections.

Step 4: Update your projection spreadsheet

Your cash flow spreadsheet is a living document. If you keep it as a Google Sheet, it will be available anytime, anywhere. You’ll also be able to easily share it with someone else, such as your accountant or another employee.

A good cash flow spreadsheet is updated on a regular basis. Once a week, log in and update your closing cash balance. If it doesn’t match your previous calculations, it’s a good idea to figure out why. Sometimes expenses you forgot about pop up, or you realize you may have been too optimistic in your revenue projections.

Next, hide last month’s column. You won’t need it anymore since it’s in the past.

Finally, add a new week of projections in the last column. You always want to have a minimum of four to six weeks laid out so you can plan ahead.

Any time you’re projecting a shortfall, the closing cash balance will alert you by turning red, which prompts you to make some changes. In the template provided, you can see that a shortfall is predicted in the second month.

Cash flow management tools

From spreadsheets to dedicated financial management platforms, there are many options for cash flow management tools to help you get a better handle on your business.

Google Sheets

For some businesses, the free tool is the best one: Google Sheets. Anyone can use a Google spreadsheet to create cash flow statements. Although it’s a manual process, it doesn’t take long to set up, and it’s easy to track. More importantly, it’s easy to customize on the fly and adapt to your specific needs or situation. You can be as broad or as specific as you want. And the time you spend creating and updating your spreadsheet is valuable for gaining a clearer picture of your situation.

The cash flow spreadsheet is an outline of where your cash is going. It shows you when cash will be coming in and when it will be going out, and it’s a great way to visualize cash flow management and adjust your approach.

Tesorio

Tesorio offers advanced tools for cash flow management. Its Total Cash Flow Dashboard integrates with your banking and accounting platforms to provide real-time insights into your cash flow. It notes patterns and makes recommendations and forecasts based on that data.

Kolleno

Kolleno offers features for cash flow management, accounts receivable (AR), and reconciliation. It will help you analyze current cash on hand and predict future cash flows, as well as automate for efficiency.

Jirav

Jirav is a comprehensive financial management platform with dedicated features to analyze and optimize cash flow. It specializes in integrating your cash flow analysis with the overall financial picture of your business. It also includes automation and integrations with many major platforms.

Causal

Causal is a dedicated financial modeling tool for businesses. It includes a long list of features that go beyond just cash flow management. Causal also visualizes the data to make it easy to understand and share.

How to improve cash flow

1. Focus on inventory control
2. Lease, don't buy
3. Send out and pay invoices right away
4. Look for alternative revenue streams
5. Check if suppliers offer early pay discounts
6. Use a high-interest savings account

1. Focus on inventory control

With cash flow management in mind, consider updating inventory to reflect current supply-and-demand levels in your business. Do a frequent ABC analysis of your products to determine what’s selling and what’s not. Then, you can keep more inventory on hand that’s likely to move fast, and get rid of dead stock at a discount.

2. Lease, don’t buy

Small business finance is always tricky, especially during challenging times. You don’t want to get into much debt, but sometimes you need to invest in equipment or inventory that will pay off in the long run. Good cash management practices would be to lease rather than buy. When you lease, you can make small payments over time and keep cash flow for your day-to-day operations. It’s also a business expense, so you can write it off on your taxes.

3. Send out and pay invoices right away

One key part of small business cash flow management is getting paid as soon as possible. If you send out invoices immediately, receivables will come in faster.

If you typically operate on a monthly billing cycle, talk with your vendors to let them know you’ll be moving to an invoice-on-demand model. Bonus points if you offer them an early pay discount.

💡 TIP: Use Shopify Bill Pay to easily view, upload, pre-schedule, and pay vendor invoices via credit, debit, or ACH transfer without paying subscription fees.

4. Look for alternative revenue streams

If your scenario is changing and putting pressure on your current revenue streams, look for alternative ways to make money online. You may be able to temporarily, or even permanently, replace less profitable revenue streams with easier, more effective ones.

For example, many brick-and-mortar businesses were forced to close during the COVID-19 pandemic due to mandatory shutdowns. A main source of cash flow for these businesses was foot traffic. To combat the drop in revenue, they are moving their business online and offering different shopping experiences, like buy online, pickup in-store (BOPIS) and local delivery options.

This can help make managing your cash flow easier and take pressure off your top line.

5. Check if suppliers offer early pay discounts

One way to preserve working capital and cash flow management is to pay suppliers less. Some suppliers may have early pay discounts you aren’t aware of. Paying your suppliers early can help you save cash and even improve the integrity of your supply relationships, especially if other vendors are delaying payments in abnormal business conditions.

6. Use a high-interest savings account

To maximize your cash flow, put money into a high-interest business savings account. Find an account that gives you more than 1% for leaving your cash in it, with a low minimum deposit. This can improve your cash position month by month and help you prepare for any unforeseen impacts on your customers or suppliers.

Learn more: How to Use Financial Statements for Your Ecommerce Business

Benefits of cash flow management

1. Predict shortfalls
2. Reduce business stress
3. Know when to grow
4. Gain leverage
5. Improve budget accuracy

1. Predict shortfalls

Find an account that gives you more than 1% for leaving your cash in it, with a low minimum deposit. This can improve your cash position month by month and help you prepare for any unforeseen impacts on your customers or suppliers.

For example:

• Call your landlord and ask them to cash your check a few days later
• Delay a shipment by a couple of weeks to put off paying duty at customs
• Run a promotion to drive additional sales quickly
• Go on a collection to spree to clear up outstanding bills

2. Reduce stress

Believe it or not, managing cash flow will alleviate a lot of stress. Much of the anxiety entrepreneurs experience around paying bills comes from not knowing what’s going on and worrying about whether or not things will work out.

It’s much better to know what’s coming, even if the outlook isn’t good. When you know where you stand, you’ll feel prepared. More importantly, you’ll be equipped to deal with it.

3. Know when to grow

When you’re managing cash flow, you know exactly how much money you have to spend on growth. Remember, just because your P&L tells you there’s extra money lying around, doesn’t mean it will materialize in real life.

Similarly, just because you have $20,000 in the bank doesn’t mean you can spend it. You might need it to pay for upcoming expenses. When you look at your cash flow over weeks and months, you’ll know how much to keep on hand and how much you can stash away or spend on growth.

4. Gain leverage

Effective cash flow analysis gives you leverage. If you need to borrow money from the bank via a line of credit to get you through a shortfall, or want to get a supplier to give you a break for a few weeks without interrupting service, a good cash flow management system will back you up and establish trust.

Financial institutions generally like to see this kind of planning, especially if you can clearly show when you’ll be able to repay the funds. Suppliers are much more likely to be flexible if you can tell them exactly how you’ll pay and when—rather than cutting communication like most businesses do during tough periods. These people want your business and will be more willing to work with you through the ups and downs if they can trust you.

5. Improve budget accuracy

Cash flow is significantly more accurate than a budget. Budgets tell you what you want to happen. They’re wishful thinking, and entrepreneurs are optimistic by nature. Cash flow projections tell you what is actually happening so you can deal with it—even if it’s not what you planned at the beginning of the year.

Business owners would often rather not think about managing cash flow and just hope it all works out. But it’s not worth the risk. You really will feel better by staying on top of your money.

Get a free cash flow projection template

Most companies can’t survive without proper cash flow management. But anyone can do it. Take the time to get organized now and it’ll be easy to stay on top of it.

If you haven’t already, don’t forget to grab your free cash flow template. You can access the spreadsheet in Google Drive. You’ll need to be logged in to your Google account to make a copy.

Get the free template

Illustration by Till Lauer