Cash Flow - How It Works to Keep Your Business Afloat

© The Balance, 2018

Cash flow is the money that is moving (flowing) in and out of your business in a month. Although it does sometimes seem that cash flow only goes one way—out of the business—it does flow both ways.


Cash Flow Help During the COVID-19 Pandemic

Several forms of coronavirus relief are available to small businesses affected by the pandemic:

The Paycheck Protection Program (PPP) is an SBA disaster loan that can give your business cash to pay employees. The loan is primarily an incentive for keeping or re-hiring employees. The American Rescue Plan, which was signed into law on March 11, 2021, appropriated another $7 billion to keep PPP funds flowing. It expanded eligibility to non-profits and digital media businesses.

ARP also added $25 billion in grants for bars and restaurants that suffered losses when forced to close because of the pandemic.

Congress has extended to May 31, 2021, the deadline to apply for PPP funds. The SBA will be processing applications until June 30.

Another SBA loan is the Economic injury Disaster Loan (EIDL) program. You can get an emergency advance of up to $10,000 while you are going through the process. Contact a lender for more information and applications. This program also received an additional $15 billion in ARP for continuation.

If you need cash to pay employees, you might be eligible for an Employee Retention tax credit, set up to encourage businesses to keep employees. You can take the tax credit on your quarterly employment tax return on Form 941 or you can request an advance from the IRS.


Cash vs. Real Cash

For some businesses, like restaurants and some retailers, cash is really cash: currency and paper money. The business takes cash from customers and sometimes pays its bills in cash. Cash businesses have a special issue with keeping track of cash flow, especially since they may not track income unless there are invoices or other paperwork.

Think of cash flow as a picture of your business checking account over time. If more money is coming in than is going out, you are in a "positive cash flow" situation and you have enough to pay your bills. If more cash is going out than is coming in, you are in danger of being overdrawn, and you will need to find money to cover your overdrafts.


Why Cash Flow Is So Important

Lack of cash is one of the biggest reasons small businesses fail. It's also called "running out of money," and it will shut you down faster than anything else.

Starting a Business: Dealing with cash flow issues is most difficult when you are starting a business. You have many expenses, and money is going out fast. And you may have no sales or customers who are paying you. You will need some other sources of cash, like through a temporary line of credit, to get you going and on to a positive cash flow situation.

The first six months of a business are a crucial time period for cash flow. If you don't have enough cash to carry you through this time, your chances for success aren't good. Suppliers often won't give credit to new businesses, and your customers may want to pay on credit, giving you a "cash crunch" to deal with.

In estimating your cash flow needs for your startup, include your personal living expenses that will need to come out of the business. The less you need to take from your business for personal costs, the more you can devote to your business during the crucial startup time.

Seasonal Business: Cash flow is particularly important for seasonal businesses—those that have a large fluctuation of business at different times of the year, like holiday businesses and summer businesses. Managing cash flow in this type of business is tricky, but it can be done, with diligence.

Cash Vs. Profit: It's possible for your business to make a profit but have no cash. How can that happen? The short answer is that profit is an accounting concept, while cash, as noted above, is the amount in the business checking account. Profit doesn't pay the bills. You can have assets, like accounts receivable (money owed to you by customers), but if you can't collect what's owed, you won't have cash.

Tips for Managing Your Cash Flow




End Unprofitable Relationships. Decide when it's time to end a relationship with someone who never pays.

Using a Cash Flow Statement


For example:

  • What happens to cash if a customer pays a bill? 
  • What happens to cash if your business buys supplies?

At times, you may need to keep track of cash flow on a weekly, maybe even a daily, basis. 

To dig deeper into this tip: 



Four Easy Ways to Get a Cash Flow Statement


If you have time to do only one business analysis every month, make it a cash flow statement to keep track of your cash position.

Getting Temporary Cash Flow Help


When you get a credit line, you have a certain amount of credit in an account that you can draw on when you are short of cash and pay back on when you have extra cash. You owe interest charges only on the amount taken out. For example, if you have a $25,000 line of credit, and you have taken out $10,000, you would pay interest only on the $10,000.