How to Measure Small Business Cash Flow

Cash flow, in its most basic sense, represents the movement of money into, around, and out of a business. Just like the blood flowing around our body keeps us alive, the flow of cash keeps a business alive. 

Maintaining a positive cash flow can mean the difference between thriving or going bust. While a company may be profitable on paper, if it’s not generating positive cash flow, it can face significant challenges that could result in permanent closure.

Here’s what you need to know.

What Is the Impact of Cash Flow on Small Businesses, in Particular?

Proper cash flow management for small business operations is vital.

Large businesses and enterprises are likely to have decent cash reserves in place or can get financing quickly which means they don’t suffer as badly if their cash flow becomes restricted.

In contrast, small businesses often operate on thin margins with limited or zero cash reserves. A single delayed payment or unexpected expense can have a detrimental effect and can cause serious problems as well as result in a long recovery period. 

Furthermore, a lack of positive cash flow can prevent growth opportunities, result in late payments of invoices and staff salaries, and in extreme cases, lead to bankruptcy.

What Are the Different Types of Cash Flow and How Might They Impact a Small Business’s Success?

Understanding the different types of cash flow is essential for any small business owner aiming for financial success.

Operational Cash Flow

Operational cash flow is the cash generated from regular business operations.

This includes the revenue gained from:

  • Selling products or services
  • Payments made to suppliers
  • Wages given to employees
  • Other regular, day-to-day transactions.

Positive operational cash flow is what every small business strives for because it indicates that its core business operations are generating more cash than it consumes. It also reduces reliance on external financing or selling assets and means that the business is viable and healthy. 

For small businesses, maintaining a positive operational cash flow can be challenging but it should be what you must continuously strive for because it will allow you to pay off debts faster, and handle unexpected costs.

In contrast, a negative operational cash flow suggests underlying issues with your core business model or operations, which require immediate attention.

Investment Cash Flow

Investment cash flow relates to the money involved when a business buys or sells long-term assets. 

Examples include: 

  • Purchasing machinery or equipment
  • Purchasing real estate
  • Making investments in other businesses

Investment cash flow shows how your business is investing in its future growth and how effectively you are managing its existing assets.

For small businesses, understanding investment cash flow is crucial. Significant asset investments can drain your cash reserves. Therefore, you must ensure that your investments yield positive returns in the long run. 

Secondly, selling off assets can provide immediate cash flow, but it may also indicate a need to liquidate resources due to financial stress.

Financing Cash Flow

Financing cash flow refers to the cash movements between a business and its investors or creditors. 

This includes:

  • Funds secured from issuing stock
  • Money borrowed from banks or other lending institutions
  • Payments made to shareholders (dividends, repayments of principal, and interest on borrowed funds, etc.)

Small businesses must often rely on external financing, especially during the startup phase. 

While doing so provides the necessary capital to scale the businesses, it also comes with obligations like interest payments or equity dilution.

A heavy reliance on financing, especially high-interest debt, can lead to significant long-term costs and a severe lack of cash flow. 

Therefore, while financing is an essential tool for growth, you must ensure you have a clear strategy and manageable for making repayments.

How to Identify Sources of Cash Flow, Including Profits, Investments, and Loans

By identifying the various sources of cash flow, you will be in a better position to manage your finances and ensure the continued growth and success of your business. 


Profits are the primary source of cash flow for many businesses. The term refers to the surplus that remains after all your business expenses have been deducted from the total revenue amount. 

Sources of profit include:

  • Sales of Products or Services: Regular sales generate consistent cash inflows so you must ensure you have a clear understanding of your sales cycles, customer payment habits, and any seasonality factors that affect this revenue stream.
  • Ancillary Revenue: Businesses often have secondary sources of income such as after-sales support, training sessions, or customization services. Identifying and maximizing these revenue streams will be better for your overall cash flow.


Investments are a more complex source of cash flow, as they can result in both inflows and outflows depending on the financial decisions you make.

  • Sale of Business Assets: Assets like machinery, real estate, or even intellectual property can be sold to generate cash. However, you should weigh the long-term implications of such sales, ensuring they don’t hamper your opportunity for future growth.
  • Returns on Prior Investments: If your business invests in stocks, bonds, or other businesses, returns on these investments, like dividends, interest, or profit shares will generate incoming cash flow. However, investments can be risky so don’t rely too heavily on investments with unpredictable returns.


Loans, whether from traditional banks or alternative lenders, provide a vital lifeline for many businesses, especially during expansion phases or periods of reduced cash flow.

Types of loans include:

  • Traditional Bank Loans: A common source of cash for many businesses. Lenders assess your creditworthiness, historical financial performance, and potential for growth to determine your repayment terms and interest rates and may or may not require collateral.
  • Alternative Lenders: Online lenders, peer-to-peer lending platforms, and crowdfunding are all considered alternative lenders. Usually more flexible than traditional bank loans, they can also incur higher interest rates or unique requirements. Therefore, thorough due diligence is required before signing up to an alternative lender.

How to Analyze Your Financial Statements to Identify Areas Where Cash Flow Is Weak or Missing

Analyzing financial statements for small business cash flow management is crucial:

  1. Gather Your Financial Statements: Ensure you have the latest versions of your cash flow statement, balance sheet, and income statement.
  2. Analyze the Cash Flow Statement: Examine the cash inflows and outflows to understand how money is moving around. Note the time periods these statements cover to understand any seasonal or periodic shifts.
  3. Identify Trends in Operational Income and Expenses: On the cash flow statement, look at your operational activities. Take note of any significant fluctuations or trends over consecutive periods.
  4. Check for Discrepancies: If you notice large discrepancies between operational income and expenses you must investigate any specific entries that seem unusually high or low.
  5. Analyze the Balance Sheet: Review the liabilities section to identify any outstanding debts your business owes. Pay attention to both short-term (due within a year) and long-term liabilities (due in more than a year).
  6. Analyze the Income Statement: Focus first on the total revenue and total expenses to understand your business’s profitability. Look at individual revenue sources and expense categories to identify which areas are most profitable and which are not. Document Your Findings: After analyzing, list key insights, areas of concern, and potential cash flow strategies for small businesses.
  7. Seek Expert Advice): If you’re unsure about certain entries or need a more in-depth understanding of your financial health, consider consulting with a financial advisor or accounting service like EvolveCFO.
  8. Review Regularly: Make it a habit to analyze your financial statements regularly. This helps identify issues early and nips them in the bud.

What Are the Long-term Implications of Improper Cash Flow Management?

If your cash flow is constantly negative, it won’t be long before the impacts are felt.

Firstly, it can erode trust from suppliers and lenders, leading to less favorable credit terms or higher interest rates. 

Moreover, you’re not going to have the solvency to deal with any emergencies or sudden expenses that arise. In extreme cases, sustained cash flow issues will lead you toward the closure of your business or even bankruptcy.

What Are Strategies for Small Businesses to Maintain a Healthy Level of Cash Flow?


Budgeting is essentially creating a map of your expected income and expenses for a given period. By setting a budget, you can better see how to allocate resources without leaving yourself short in other areas.

Additionally, a decent budgeting strategy safeguards you from overspending and ensures you’re always operating within your means.

Budgets are not a “one-and-done” thing. They require regular attention, especially when an unforeseen event or change in the business environment occurs.


Forecasting provides a predictive view of the future based on historical data, current trends, and market research. By analyzing your previous sales, expenses, and cash flow patterns, and combining this with market insights, you can anticipate your potential cash flow scenarios. 

Forecasting is useful for anticipating periods of potential cash shortages or surpluses which you can take heed of and put proactive measures in place.

Debt Management

Small businesses are more likely to frequently rely on external financing, so keeping a tab on liabilities becomes even more critical. 

This includes:

  • Ensuring timely repayment of loans to avoid penalties or damage to creditworthiness;
  • Periodically reviewing interest rates and seeing if refinancing is beneficial
  • Being cautious about taking on new debt. 

A cardinal rule for small businesses is to avoid over-leveraging — that is, taking on more debt than the business’s cash flow can comfortably manage.

How to Develop a Plan to Increase Cash Flow by Reducing Debt or Increasing Revenue From Sales and Marketing Activities

Assess Current Financial Position: 

  • Review current financial statements to understand where your business stands financially

Identify Revenue-Boosting Opportunities

  • Brainstorm potential new products or services
  • Research and identify new markets or customer segments
  • Survey current customers to identify potential opportunities.

Ramp Up Marketing Efforts

  • Allocate a budget specifically for marketing campaigns 
  • Engage in digital marketing, using platforms like social media, email marketing, or pay-per-click.
  • Consider running limited-time promotions or discounts

Review Operational Costs

  • List out all operational expenses and identify any areas where costs can be reduced 
  • Explore the possibility of automating repetitive tasks 

Tackle Debt Reduction

  • Compile a list of all outstanding debts
  • Prioritize repayment of high-interest debts first 
  • Consider consolidating multiple debts into one with a lower interest rate
  • Reach out to lenders to renegotiate loan terms or refinancing options.

Optimize Supplier Contracts

  • Review contracts with suppliers and vendors. Are there any opportunities for discounts, bulk-purchase deals, or better payment terms?
  • Consider renegotiating contracts or exploring alternative suppliers 

Monitor and Adjust

  • Consistently monitor your plan’s impact on cash flow.
  • Use monthly or quarterly reviews to assess the success of each strategy and make adjustments as needed

How to Utilize Technology Like Automated Accounting Systems to Make It Easier to Track Cash Flow and Make Adjustments

Specialist accounting software is always a great investment.

This software automatically tracks real-time inflows and outflows, categorizes transactions, and provides alerts for anomalies. 

This greatly reduces manual errors and saves time. By integrating other business tools, like inventory management or CRM, a comprehensive view of finances can be achieved with little to no ongoing effort.

How to Use Cash Flow Forecasting Software to Project Future Cash Flow Needs

Forecasting software employs algorithms and historical data to predict future cash scenarios. 

By inputting variables like projected sales, anticipated expenses, and known liabilities, you can understand your future financial health. 

Using this software helps in making pre-emptive adjustments, securing financing ahead of time, or capitalizing on upcoming opportunities.

Tips to Stay on Top of Invoices and Bill Payments to Ensure Timely Collection of Funds From Customers

To maintain healthy cash flow, prompt invoicing and bill collection are crucial. Here are some tips:

  • Implement an automated invoicing system to ensure timely billing.
  • Offer discounts for early payments to incentivize customers.
  • Establish clear payment terms and stick to them.
  • Regularly review accounts receivables to identify delinquent accounts and take action.
  • Consider invoice factoring for immediate cash needs.

For professional help with cash flow for small businesses, analysis, budgeting, planning, forecasting, and more, contact EvolveCFO today.