Cash flow is the lifeblood of a business. A business that manages it well is far more likely to survive the long run; poor cash flow management causes disruption and, in the worst case, unforeseen closure. This guide covers:
- Simple tips to increase your cash flow
- What discounted cash flow is
- How to manage cash flow for your business
- What business cash flow is and why it matters
- How to predict cash flow for your business
- Operating cash flow, with an example
Simple tips to increase your cash flow
Cash flow refers to the funds moving in and out of a business within a specific timeframe — it's one of the clearest measures of a business's financial health. If a business is constantly spending more than it earns, it has negative cash flow, which it can't sustain indefinitely. The aim is positive cash flow: driving cash inflow up and cash outflow down. Five ways to do that:
1. Check your expenses
Many businesses focus on the money coming in and lose track of how much flows out the back door — big spending on hiring, inventory, equipment, location, and technology, plus unexpected costs like equipment repair. Increasing cash flow requires tracking all your expenses periodically, which also helps you quantify the return on each one and make wiser spending decisions.
2. Optimize your pricing
One useful lever is the price of your products and services. Selling for too little leaves cash flow on the table; too aggressive a price increase can hurt sales. Businesses often reach for discounts as a quick fix for cash flow, which can work short-term but has long-term costs — the goal is the mid-point that boosts cash flow without losing sales.
3. Give customers a reason to pay early
Late payments tie down cash. Set a clear payment timeframe, consider a small discount for early payment, and send reminders — with a stated late fee — for overdue invoices, so customers are incentivized to pay on time or early.
4. Control inventory
Holding too much stock ties up cash — both the initial cost and the ongoing cost of holding and maintaining it, cash that could be invested elsewhere. Buying more inventory than you're selling is a common cash flow drain; better inventory control improves inventory turnover and reduces cost of goods sold.
5. Improve your marketing
Anything that grows the business tends to improve cash flow, and a focused marketing strategy is one lever — but marketing spend should be targeted at the customers most likely to convert, rather than spent broadly, to keep marketing cost-efficient while growing revenue.
What is discounted cash flow?
Discounted cash flow (DCF) answers a simple question: what is the current value of cash you'll receive in the future? It's used to value an annuity, a property acquisition, or any fixed-asset purchase, and it rests on the idea that cash today is worth more than the same amount later — because cash in hand today can be invested and earn a return between now and then. There are seven steps to a DCF analysis:
1. Project the financial statements
You can't project every line item, but a gradual forecast built from the income statement, balance sheet, and cash flow statement gives a workable picture of what the business will be worth in the future.
2. Estimate free cash flow to the firm
Free cash flow is what's left after operating and capital expenditure are covered — the cash a business can use to expand and grow. Estimating its future value lets you pin down the future value of that free cash.
3. Determine the discount rate
The weighted average cost of capital is the most common approach, which requires estimating both the cost of equity and the cost of debt — debt being the current cost of what the business is paying on its borrowing.
4. Calculate the terminal value
Usually done with the perpetuity method: taking the final projected year's cash flow together with an assumed long-term growth rate and the discount rate.
5. Run a sensitivity analysis
Test the DCF against changes in the long-term growth rate and the weighted average cost of capital, since both are assumptions rather than certainties.
6. Adjust the valuation
Account for non-core assets and liabilities that didn't appear in the free cash flow projection — net debt, under/overfunded pension liabilities, environmental liabilities, minority interests, and investments/associates at market or estimated value.
7. Calculate present value
Combine the projected free cash flow to the firm with the terminal value to arrive at the present value.
How to manage cash flow for your business
Keeping an eye on cash flow periodically is one of the clearest ways to gauge the health of a business — how much is coming in and going out, and when. Cash flow problems happen to nearly every business at some point; the goal is managing them rather than avoiding them entirely. Five ways to manage cash flow well:
1. Get paid fast and on time
Closing the gap between invoicing and payment is one of the biggest levers you have. Rather than defaulting to end-of-month invoicing, ask about the payment method that works best for your client, use invoicing/payment tools that make paying easy, and send reminders until the invoice is settled.
2. Build a financial cushion
Set aside enough savings to run the business for 3–6 months if customers don't pay on schedule. Start small and grow the cushion over time, sized against your own cash flow forecast.
3. Take a strategic approach to growth
Sudden, unplanned spending toward growth can disrupt cash flow and leave you short on payday. Growth itself isn't the problem — forecast what it will cost in cash and finance first, and stay on top of any resulting debt repayment schedule.
4. Incentivize early payment
A modest discount for paying early can meaningfully shift customer behavior and improve your cash flow statement — especially when targeted at the customers who are usually slower to pay.
5. Decide: lease or buy?
For equipment, property, and facilities — especially technology that evolves quickly — leasing avoids tying up a large share of your capital, while buying may make sense depending on the business's cash position. There's no universal right answer; base it on the health of your cash flow.
What is business cash flow, and why does it matter?
Cash flow is the movement of funds in and out of a business. Profit is the primary goal, but profit alone isn't always enough to sustain a business — it needs cash in hand to cover expenses and survive. Cash flow has two sides: cash outflow (raw materials, labor, transport, maintenance, and other running costs) and cash inflow (payments from clients for goods and services, plus royalties, commissions, and fees).
Measuring your cash flow
Most businesses measure cash flow monthly, though weekly or quarterly measurement isn't uncommon — what matters most is measuring it at regular intervals. With good transaction records, the analysis itself is simple: compare cash on hand at the start of the period against the end.
Positive cash flow
Cash flow is positive when a period ends with more cash than it began with. For example: starting the month with $10,000, spending $6,000 on business transactions, and collecting $11,000 from customers leaves $15,000 at month's end — a positive cash flow of $5,000. Positive cash flow means bills get paid, new investments become possible, and the business can absorb unpredictable setbacks.
Why cash flow matters
Inadequate cash reserves are one of the most common reasons businesses fail — strong sales don't help if there's no cash on hand to pay bills. Cash flow matters because it:
- Predicts the future. Regular measurement shows the trend your business is on and helps you prepare for the months ahead.
- Stabilizes the business. Positive cash flow means more buying power and more protection against loan defaults or foreclosure.
- Enables growth. Strong cash flow lets a business invest and grow proactively rather than operate defensively.
Negative cash flow
Negative cash flow means more cash is leaving the business than coming in — the balance is shrinking rather than growing. A single negative month usually isn't a problem if reserves are healthy; it becomes a risk when it turns into a trend. It's common for startups (many bills, few sales yet) and for businesses making new investments, and is expected to turn positive as revenue grows.
How to predict cash flow for your business
Cash flow forecasting matters at any size of business — a large share of business failures trace back to poor cash flow management and forecasting. A cash flow forecast (or projection) estimates your money needs in advance, so that strategy and planning have the finance to back them up. To forecast accurately:
Estimate how much money you’ll generate
Estimate sales on a weekly, bi-weekly, or monthly basis, using your sales history as the baseline. Factor in seasonal patterns, holidays, and the expected effect of any planned promotions or advertising.
Factor in your payment terms
Not every sale turns into cash immediately — some customers pay at the point of sale, others on trade credit with a delay. Your forecast needs to reflect when you actually expect to receive payment, not just when the sale is recorded.
Estimate how much you’ll spend
Separate fixed costs (rent, salaries) from variable costs (tied to what you sell), list what's due and when, and compare against the previous year's expenses. Once revenue and expenses are laid out for the period — weekly, monthly, quarterly, or annually — you have your forecast. Revisit and update it as the business moves forward; it isn't a one-time exercise.
What a cash flow forecast actually is
A cash flow forecast projects when cash will come in and go out of the business, and what's likely to be left in the account at the end of the period. It shows where the business is doing well and where it's struggling, effectively tracking annual profit against year-end debt.
Operating cash flow, with an example
Profit and cash are not the same thing — a profitable business can still run out of cash if it doesn't manage the numbers well. Expenses like inventory, equipment purchases, and debt repayment leave the bank account without necessarily showing up in the profit and loss statement. Likewise, a sale made on account shows up as revenue in the P&L immediately, but the cash itself sits in accounts receivable until the customer actually pays. This is why a cash flow projection matters: it's the link between the P&L projection and the projected balance sheet.
Why run a cash flow analysis
Cash flow is never static — it covers outgoing expenses, incoming payments, deferred payments, and the variables that affect your finances day to day. A clear picture of it lets you plan for, rather than be surprised by, changes in your financial position.
How cash flow analysis helps
A cash flow projection helps predict cash shortages and surpluses, forecast expected sales for a period, and estimate fixed and recurring costs. It gives a fuller picture of expenses and income over time, helps measure the cash effect of business changes (like a new hire), and makes it easier to spot where the business is falling short and adjust quickly.
Cash flow example: the direct method
The direct method is the most common cash flow statement format. Cash moves in two directions — inflows are shown as positive, outflows as negative. Dividends are cash payouts available only to shareholders, and "proceeds" refers to cash received from various sources. Like other financial statements, a cash flow statement is typically prepared yearly, though its non-static nature means it can be prepared at any point during the year as well.