What is cash flow?

Cash flow is the movement of money into and out of your business over a period of time. Money coming in, such as customer payments, is a cash inflow. Money going out, such as rent and supplies, is a cash outflow. The difference is your net cash flow.

How it works

Net cash flow = cash in minus cash out. If it is positive, your cash balance grew. If it is negative, it shrank.

Accountants group cash flow into three types:

• Operating: day-to-day activity, such as customer payments and supplier bills.
• Investing: buying or selling equipment or property.
• Financing: loans, repayments and owner contributions.

For a small service business, operating cash flow is the one that matters most, and it depends on how fast invoices are paid. An invoice is not cash. It becomes cash only when the customer pays, so slow collections create a cash gap even when the work is profitable. That unpaid balance is your accounts receivable, and the average wait is measured by days sales outstanding.

A cash flow forecast projects expected inflows and outflows for the coming weeks so you can spot a shortfall before it happens.

Example

A painter has $2,000.00 in the bank at the start of May.

Practical ways to improve it

1. Send invoices the day work ends. The free invoice generator makes that quick.
2. Shorten payment terms or use due on receipt for small jobs.
3. Ask for a deposit on larger projects.
4. Charge late fees consistently. See the late fee calculator.
5. Review upcoming bills so you know when large payments are due.

PayToMe is in public beta, and its cash-flow forecast is in development. Read about the cash flow forecast for its current status.

Related terms

• Accounts receivable: unpaid invoices that will become cash.
• Accounts payable: bills you still need to pay.
• Days sales outstanding: how long collecting takes.
• Invoice factoring: selling invoices to get cash sooner.