Cash Flow Monitoring, Management, and Modelling

Updated: Feb 7

Cash flow is vital to all businesses — big, small, new, and old alike. Cash flow is almost like your business's oxygen, and you need to monitor, manage, and model it if you want to achieve success.

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As a business owner, it's crucial that you stay on top of your cash flow at all times. After all, it’s indicative of the health and status of your company. But it also helps your business stay afloat in the face of unpredictable circumstances, like the COVID-19 pandemic. Therefore, you have to become even more in control of your money flow to be prepared for possible similar future scenarios.

The best time to learn about cash flow is now, especially since it can make or break your business. But don't worry, because Profit Reimagined™ is here to help you understand it. We'll explain cash flow both as a concept and a series of processes to help your business succeed amid all circumstances.

What Is Cash Flow?

Cash flow is the movement of money into and out of your business. It involves two fundamental aspects: the inflow and the outflow.

Money inflow refers to all forms of cash received by your business. They may be from sales, investments, funding, and other sources of money that go to your company. Meanwhile, cash outflow refers to the money that goes out of your business. That includes all payments to be made, such as business expenses, employees’ salaries, and dividends for shareholders, among other things.

Is Cash Flow the Same as Profit?

People sometimes confuse cash flow with profit. The two are different, and it’s essential to understand both to steer your business toward success.

Cash flow, as defined above, is the movement of money into and out of your business. Anything your company receives counts as a cash inflow, while everything you pay and distribute makes up your cash outflow.

On the other hand, profit is what your business gains. Here are its two types:

  • Gross profit — the amount that remains after you subtract the production costs from your total earnings

  • Net profit — the amount that remains after you subtract all business expenses, not just the production cost, from your total earnings


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What Are the Three Types of Cash Flow?

Many businesses’ cash flow rarely comes from a single source, nor are they used for just a single purpose. Instead, they revolve around the investing, financing, and operating aspects of your business.

A complete cash flow statement details the sources and uses of every transaction your business undergoes. That comprehensive accounting can tremendously aid your cash flow analysis and help you find out which sources you can most depend on to keep your cash flow up and running.

3 Types of Cash Flow:

1) Cash Flows from Investing Activities (CFI)

Cash flows from investing activities (CFI), also called investing cash flow, reflect money inflows and outflows from all your business investments. They may include the purchases of assets and investments in other business ventures, such as securities.

Sometimes, you may observe a negative CFI, meaning your cash outflows outweigh your cash inflows. This may be due to investments made to secure your business's health, so it's not always indicative of a problem.

2) Cash Flows from Financing Activities (CFF)

Cash flows from financing (CFF), also called financing cash flow, refer to cash flow used as funding and capital. They involve gains and losses from paying dividends, debt repayments, and equity. The CFF can provide a view of the financial health and strength of your business.

3) Cash Flows from Operating Activities (CFO)

Cash flows from operating (CFO), also called operating cash flow, pertain to flows involved in your company's regular business operations. The CFO is computed by taking the amount of cash generated from sales minus the production and operating expenses. It's usually calculated with cash flows reported within a given period.

Additionally, the CFO can provide business insights into whether your company generates enough money to maintain long-term business operations.

Let's take a closer look at the CFO:

It involves daily, weekly, monthly, and quarterly business transactions that result in cash entering and leaving your business.

  • Operational cash inflow — refers to the cash generated from sales revenue

  • Operational cash outflow — pertains to the cash lost when paying expenses



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Why Is Cash Flow Important to Your Business?

To put it simply, cash flow is vital to your business because it keeps your company running. It’s crucial to monitor your actual cash flow to understand your financial status, strength, and capability. With comprehensive financial statements, you can conduct a rigorous and accurate cash flow analysis.

While some businesses appear to fail for many reasons, most of their problems are usually cash management-related. They may not have had enough sales to sustain their business. Perhaps, important and timely purchases were mishandled. Sometimes, the business cash flow has been negative for a long, and one final blow just topples it over.

With the right information and management techniques, you can predict how long your company can stay in business. Knowing that will help you prioritize and plan how you manage your cash flow and may keep you in business longer.

How to Monitor Your Business Cash Flow

As a business owner, you have to keep your finger on the pulse of your company at absolutely all times.

Every transaction in or out of your business is a piece of data you can use to assess your financial status and cash flow. More specifically, you can look at each transaction to see whether you’re moving toward positive cash flow. You can refer to recent financial statements, money spent on production, cash acquired, sales, and budget, among other things.

Examining those business aspects can give you the big picture and reveal important data on your cash flow status.

Cash Flow Statement

Monitoring cash flow is a low-intervention activity that provides vital information to support cash management. You can compare your previous cash flow statements with those of the present. Similarly, you can compare other businesses' cash flow data with yours if they're publicly and legally available.

Your Goal

You have to mark the runway date of your business. This refers to the day your company would have to close due to insufficient revenue. You can do that by constantly monitoring your cash inflow and outflow data for a series of periods.

Cash flow is often cyclical. That’s why you should pick logical windows of time when looking for your business cash flow trends. Those logical time windows may be a year, a season, a week, or in some cases, a day.

How to Know If You've Achieved Your Goal

You'll be able to name the factors that affect your cash flow when you identify your business's potential closing date. From there, you can talk accurately and knowledgeably about your cash flow cycles.



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Cash Management

You should always be ready to control your business, and this includes your cash flow. That way, you can be proactive about the risks that affect your company and the growth opportunities you encounter.

Cash management occurs when you plan and manipulate your business cash flow to extend your business's runway. Cash flow management is considered:

  • Transactional — like up-selling a product to get more revenue, or paying an invoice based on the negotiated terms

  • Operational — involves inventory management, sales, and managing payroll

  • Strategic — short-, mid- and long-term planning to advance the goals of your business's best advantage

Managing cash flow is a high-intervention and high-communication activity. It involves constantly monitoring information and using real-time tools to manage cash. All of those are necessary to achieve the ultimate goal of making and maintaining your cash flow positive.

Your Goal

You must aim to extend your business's runway by managing all the circumstances faced by your company. That involves transactional, operational, and strategic cash management.

How to Know If You've Achieved Your Goal

You can deem your cash management effective if your business can extend its date of closure. You can achieve this by adding to your company’s cash reserves or savings and addressing shortfalls ably and promptly. Likewise, you have to be able to repay debt comfortably, pay shareholders timely and reinvest in your business.

Cash Modeling

You need to gain foresight and visibility around the possible outcomes of future events regarding your business. In addition, you need to stress-test your company against a range of what-if scenarios, including internal and external circumstances.

Cash modeling occurs when you clearly articulate and show the causes and effects of an event on business cash flow. Cash modeling:

  • Requires an understanding of your business, its cash-monitoring findings, cash flows and cash management practices

  • Starts with an idea that goes something like, "What if [this event] were to happen on [this date]?"

  • Should be approached as a series of quick sketches that can either be discarded or refined as time progresses

  • Needs to be considered extensively from both the growth and the risk angles

Modeling cash flow is a high-value, communication-based strategic activity that requires constant monitoring of information. It also utilizes real-time tools to create and consider what-if scenarios in planning your business movements. And, again, you need to do so around both risk and growth angles. You should invite all stakeholders to model out the what-ifs that affect their particular domain.

Your Goal

You should prepare yourself and your business against scenarios that may affect your runway date. These may include inflation, global pandemics, or sudden competitions. Stress-test your company against such projected circumstances to ensure that it is established enough to endure any of them.

How to Know If You've Achieved Your Goal

You may want to plot various probable events and their impact on your cash flow along an extended sightline. While nothing is assured, doing so will help you weather risks and grab growth opportunities, both in the near and far-off future. Your runway will appear solid and long if you test your business against a variety of imagined scenarios.

Furthermore, your decision-making process regarding your business will become more straightforward. After all, modeling what-ifs leads to clarity of mind and effective prioritisation. In addition, it paves the way for action and communication with your entire team and concerned stakeholders.



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To Wrap Up

Cash flow is like the blood and oxygen of your business. It breathes life and brings movement to your company, and it keeps your business up and running. Without cash flow, any business will absolutely fall and cease operations.

As a business owner, it's imperative that you understand cash flow as a concept and an integral part of your business. You need to be aware of your cash inflows and outflows by constantly monitoring them. You also need strategies and techniques to manage your cash flow. In addition, you have to model your cash flows to see how your business fares against different scenarios and possible future events.

We completely understand that all this may be daunting and even confusing at first. However, it's crucial to monitor, manage and model your cash flow if you want to achieve business success.

But don't worry!

The Fractional CFO at Profit Reimagined™ is just one chat away from helping you understand these concepts and execute these strategies.


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