Cashflow 101: How to manage you cashflow for new business owners

Cash flow is likely the most important aspect of running a small business. For most businesses, running out of cash can easily lead to shutting down entirely. Yet small businesses are made out of many moving parts, and it can be very difficult for small business owners to track every transaction. Here’s what you need to know about managing your cashflow effectively.

The Importance of Forecasting Your Cashflow

A cashflow forecast is, in theory, simple: it’s a report that projects out where your business will be if expenses and income remain the same. Do you want to know how much money you’ll have in a month? What about in a year? A cashflow forecast is how you figure that out.

Yet though it’s simple in theory, it can be complex to manage. In order to accurately forecast your cashflow, you need to have accurate bookkeeping. You need to be able to account for things such as rises in supply and demand. And you need to do it all consistently: a cashflow forecast should be included every time you run financial statements.

A cashflow statement will ultimately reveal issues with your current income and expenses. It may be that you only have enough operating capital to run your business for the next eight months. It may also be that you have a surplus of cash which can be invested in growth. Either way, it’s better to know now rather than later: by identifying issues now, you can react accordingly.

How to Create a Cashflow Forecast

Cashflow forecasts generally use year-over-year numbers. This means that you’ll be comparing May 2019 to May of 2018, rather than comparing May 2019 to April 2019 (month-over-month).

This is done to account for seasonal differences. Most businesses experience seasonal changes in their sales and their expenses. But because you are comparing year-over-year, you also often need to factor in your growth. You should be as conservative as possible about this, using growth over the past few years.

To create a yearly cashflow forecast in a spreadsheet:

  • Begin by creating a column for each month, starting from the end of your fiscal year. (This assumes you’ve already finalized your prior fiscal year’s numbers.)
  • Your first row should be cash in the bank. At the first month of the new fiscal year, put in the amount your prior fiscal year ended on.
  • Your next rows should be income. In each column, put the income from last year: e.g., May of 2019’s income will be May of 2018’s income.
  • Your next rows should be expenses. In each column, put the expenses from last year: e.g., May of 2019’s expenses will be May of 2018’s expenses.
  • At the end of each column, add a sum total which takes the “cash in the bank” amount, adds income, and deducts expenses. The sum total of January will become February’s “cash in the bank” amount, and so forth.

This will create a flat projection: projected income and expenses based on the idea that nothing significant has changed from the prior year. If you need to account for additional expenses and growth, you will need to adjust the numbers accordingly.

Here is an example of a (very simplified) cashflow report:

January 2019 February 2019 March 2019
Cash in Bank $100,000 $105,000 $105,000
Income $10,000 $5,000 $8,000
Expenses ($5,000) ($5,000) ($5,000)
Total $105,000 $105,000 $108,000


Of course, a company’s cashflow report will be substantially more complex than the above, but the premise will remain the same. Income is added, expenses are deducted, and a running tally is kept of the cash that is expected to be in the bank.

Keep Track of Your Projections

Once you’ve created a projection for the upcoming fiscal year, you should consistently update it with the real numbers. This will give you an increasingly more accurate projection moving forward. This cash projection should be included with other financial statements (balance sheets, general ledger reports, and income and expense reports) to give you a better idea of how your cashflow looks.

The goal of this cashflow report is to warn you when your bank balances may be nearing the red. If you start to move into a deficit, you’ll be able to see it quite quickly on your cashflow report.

Tips for Making the Best Cashflow Report

Cashflow reports may vary in accuracy, depending on the amount of time and energy you put into them, and the size of your business. Here are a few tips for getting a more accurate report:

  • Use the right software. Many accounting programs can generate cashflow reports automatically, taking into account both your past numbers and current trends.
  • Be conservative. It’s better to think that you have less cash in the bank than think you have more. Being too optimistic about your numbers can lead to overspending.
  • Investigate discrepancies. If your cashflow reports are frequently found to be inaccurate, it’s important to uncover why. It may be something as simple as a forgotten expense, or an unbooked revenue stream.
  • Get granular if possible. Rather than just having a row for “income,” break out your income into sections. This will help you notice potential issues, such as income being included from a source that is now defunct.
  • Make sure your books are reconciled and accurate. Your cashflow report doesn’t really generate any information in itself: it pulls all of its data from your income/expense reports. If these reports are incorrect, your cashflow report will be incorrect.

If your business is new, you may need to complete your cashflow projections on a monthly basis rather than an annual one.

A professional bookkeeping service or accounting clerk can help you make sure that your financial reports and bookkeeping are accurate. From there, you can use your cashflow reports to improve the overall health and consistency of your business.