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What Is Cash Flow and How Can You Control It?

Cash flow can be a tricky concept to master, but learning how to manage it well (hint: HoneyBook can help!) ensures you have the cash on hand to keep operating in the long term.

Your cash flow plays a big part in your financial statements, day-to-day business operations, and overall business health. Beyond tracking the amount of money you receive and spend, understanding your cash flow can help you chart a course to growing and scaling your business.

After managing your expenses, you might notice that your business’ profit (revenue after costs) may be different than what’s in your bank account. Often times this is due to a positive or negative cash flow. With money moving in and out all the time, here’s how to better understand cash flow and control it.

Definition of cash flow 

By definition, cash flow is the status of the cash inflows and outflows at any point in time. For example, if you’re spending more money than you have on hand, you’ll have a negative cash flow.

Cash flow is a complicated concept because as business owners, there’s a lot of money we spend and make on a daily basis. One day you’ll have a positive cash flow, but you might pay a few bills the next day and your cash flow is in the red.

The three types of cash flow

There are three types of cash flow to understand: operational, investment, and financing.

Operating cash flow is the most important, and the one you’ll pay attention to the most as a small business owner. Your operating cash flow considers cash received and spent related to your primary activities. So, if you’re a business coach, your operating inflows would be from your client’s payments, while your operating outflows would likely be from advertising and marketing costs and technology to run your coaching business.

Cash flow from investing is tied to any investment you’ve made or sold, such as if you’re paying off a loan (outflow), or just made money from selling your office space (inflow).

Lastly, cash flow from financing is the money you make and lose on activities related to funding your company. Repurchasing stock and getting paid through dividends are both examples of cash flow from financing.

What’s the difference between cash flow and profit & loss?

I know what you’re thinking – I’ve worked so hard to stay up to date in my bookkeeping so why doesn’t my profit and loss statement match what’s in my bank account? P&L is different from cash flow because the profit and loss statement accounts for revenue made over a period of time while cash flow accounts for a point in time. Think of your cash flow as a snapshot of your business as it stands today while your profit and loss statement is a time-lapse video.

Think of your cash flow as a snapshot of your business as it stands today while your profit and loss statement is a time-lapse video.

Typically, cashflow is converted into a cash flow statement. If you are using QuickBooks as an integration to HoneyBook, your QuickBooks software may automatically create a cash flow statement for you. Within your cash flow statement, you can identify your operating expenses and activities, investment activity, and cash flow from financing. When you work with an accountant, they’ll pull your cash flow statement along with a balance sheet and income statement to understand your business’s financial health.

Proxie app for understanding cash flow

A real-life example of cash flow

Let’s look at an example of a cash flow discrepancy for freelancers. Let’s say you’re a photographer and you’ve booked a $1,000 gig for the end of the month. You charge a $200 deposit at booking at the beginning of the month, but you have to spend $300 in the middle of the month for supplies. After the gig at the end of the month, you receive the remaining balance of $800. Although your net income may be positive $700 ($1,000 gig less $300 expenses) by the end of the gig, at one point you had a negative cash flow of $100 ($200 deposit less $300 for supplies).

Even with this easy example, we can see how a business could see a discrepancy in cash on hand vs. what is reported in your P&L statement. Although we can’t completely eradicate cash flow issues in business, we can definitely find ways to keep a positive cash flow when we can.

How to maintain positive cash flow

Here’s how you can use processes already on hand to help maintain positive cash flow. If you have client management software for small businesses like HoneyBook, it can help you facilitate each of these to make sure you’re staying in the green.

Payment Terms

A large reason why entrepreneurs have a negative cash flow is that they don’t have favorable terms that determine when invoices are paid for their business. Normally, an entrepreneur’s goal is to get paid 100% upfront, but some clients require Net 30, 60, or even 90-day payments.

My biggest advice to you is to always try to negotiate your payment terms. If a client asks for Net 30 payment terms, ask for something smaller like Net 15. You might also be able to offer your client a small 2-5 percent discount in exchange for a shorter payment term.

Your goal is to ensure that you can get paid as fast as possible to keep your bank accounts in the black! A HoneyBook’s online invoice can help you find the best payment term options for you.

Cost of Goods Sold

Cost of goods sold is the costs directly associated with selling your goods and services. A lot of these costs unfortunately don’t have payment terms like those you can add to your online invoices, so oftentimes, entrepreneurs are forced to pay these costs prior to being paid.

To maintain your positive cash flow, try to keep your costs of goods sold as low as possible. Buy supplies and packaging in bulk or source inexpensive alternatives. You can also try to purchase any common cost of goods sold items when you have the most cash on hand.

Late Payments

If you’re an independent business owner, chances are you’ve had your fair share of late payments. Not only are late payments a nuisance, but they can also really affect your cash flow and put you dangerously in debt if you can’t recoup that revenue. Here are a few steps you can implement to reduce late payments. Utilize the online contract tool in HoneyBook to find the best method for you:

  • Implement Late Fees – Late fees are an easy way to deter late payers. Late fees can be as simple as a late fee or as dynamic as percentage-based fees that compound over time. Not only will it help reduce the number of late payments you receive, but you also can make additional revenue if those invoices are in fact late.
  • Create Installment or Payment Plans – Customers may be able to pay on time when the payments are spread out over time. This also helps your cash flow because you are getting paid on a consistent basis which would cover any costs you incur throughout the delivery of the product or service.
  • Require Automatic Payments – You can guarantee on-time payments with a system that sets up recurring payments and an automatic payment reminder.
  • Refunds – As you know, refunds can be incredibly detrimental to both your net income and positive cash flow. If you are not implementing non-refundable retainers, I’d highly suggest implementing one as soon as you can. You can update your online contracts to specify your refund policy and even include clauses like force majeure to help protect your business from unexpected cancellations. Additionally, consider opting for percentage-based non-refundable retainers that cover your cost of goods sold. If your cost of goods sold is 30% per product or service, a 30% non-refundable retainer can cover costs if your customer requests a refund. Additionally, it keeps your cash flow positive so you can continue to operate.

Expertly manage your cash flow

Cash flow is a tricky concept but managing it on your own is always possible. First, make sure you have an all-in-one system for your business so you can track client payments and expenses in one place. Holding all your business financial information in a single system will help you stay more organized to have a better understanding of your cash flow.

You can always work with a professional accountant as well to make sure your business finances are set up properly and tracked correctly. Once you have a good hold of your cash flow, you’ll be on the road to great profitability and growth!

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