Business Cash Flow Planning: Beginner to Intermediate Guide


As a business owner, you should always do your best to stay one step ahead of the game. This is especially true when it comes to your cash flow.

You can improve your overall business plan by planning your finances to ensure your business always has a healthy amount of cash flow.

Without cash flow planning, your business could find itself in some seriously dangerous waters.

Let’s discuss cash flow planning and reveal the simple ways to make a solid plan for your business.

What Is Cash Flow Planning?

Cash flow is the amount of money moving in and out of your business at any given time.

So, cash flow planning means identifying moves you can make to ensure this amount is always in your favor.

Effective cash flow planning requires the use of a good old-fashioned Excel spreadsheet (or a software program that has a built-in cash flow planning component).

Related: A Simple Guide to Cash Flow Estimations

Why Is Cash Flow Planning Important?

When you anticipate the amount of cash you’ll have available in the future, you’ll put yourself in a better position to protect and build your business.

Here are a few reasons why cash flow planning is crucial to a successful operation:

1. Insufficient Cash Flow Can Increase Employee Turnover

Payroll is one of the biggest cash-out payments of small businesses. When cash flow runs low, you may not have enough to pay this important bill.

Not being able to pay your team on time will cause you to lose good employees.

Your employees have their own bills to pay — they can’t afford to wait to get paid.

2. Incoming Cash Can Be Unpredictable

Unfortunately, one of the main reasons small businesses lack cash flow is unpaid (or short-paid) accounts receivable.

In some industries, it’s common for companies to take thirty days or more to pay their invoices. Many of them are dealing with their own cash flow issues.

This lull in incoming cash can cause you a lot of problems.

Quickbooks explains that fast and accurate collection of payments is the number-one challenge that small businesses face.

Through cash flow planning, you can account for this delay and cover your bases until you’re paid.

Now can help you collect on your invoices faster. Click the link to learn more.

3. Negative Cash Flow Ruins Your Chances for Growth

When your financial situation is tight, you might forego sales or jobs because you don’t have enough cash to cover operation costs.

Then, you are stuck simply operating at your current level, without growth and without an increase in profits.

4. Lack of Cash Flow Can Break Your Business

A lack of cash flow could bankrupt your business or even shut it down completely.

According to the NFIB, poor cash flow management is one of the main reasons why small businesses fail.

Unfortunately, many new entrepreneurs mistake profit for cash flow. You can be making a profit but still run out of money.

It all boils down to cash inflow and cash outflow — the amount of money you bring in versus the amount you spend.

If your outflow is consistently higher than your inflow, your business is in serious trouble.

Benefits of Cash Flow Planning

Now that we’ve learned how a lack of cash flow planning can be devastating, let’s flip things around and talk about the positive aspects of cash flow planning.

1. Make Better Financial Decisions

The more you know about your cash flow, the easier it will be to build a financial strategy.

When you have a solid cash flow plan, you’ll know how much or how little cash you have on hand at any given period.

This will help you make important financial decisions:

  • When to take out or pay down loans
  • When to invest in new assets
  • When to sell off assets
  • When to cut costs
  • When to bring in outside investors

2. Maintain Long-Term Financial Stability

When you become aware of a problem, you are better positioned to develop a solution.

If you see a pattern in your financial statements that results in a consistent lack of net cash flow, you can take action.

To keep your cash flow stable throughout the year, you may need to diversify your products and services to create multiple streams of incoming cash.

These multiple streams should balance out your cash flow statement.

As one dries up, the other kicks in!

3. Keep Your Pricing Competitive

Small businesses must always make a difficult decision when it comes to pricing.

They need to find the sweet spot that allows them to make a profit without raising their prices too high.

When you plan and maintain a healthy cash flow, you can afford to keep your pricing competitive.

Therefore, you won’t have to jack your prices up because you desperately need working capital.

4. Managing Inventory Levels More Strategically

We already discussed how payroll is one of the biggest cash flow liabilities.

But inventory is another expense that can put a dent in your cash flow.

It may be that you are keeping too much in stock. Overstocking can cost more than just the purchase of the products.

After all, you need to consider the cost of storage and insurance premiums, as well.

Cash flow planning can keep your inventory levels where they need to be without making you strapped for cash.

Related: Why You Shouldn’t Keep Too Much Inventory on Hand

5. Help Keep Your Accounts Receivables Out of the Red

Handwritten ledger book

As a busy small business owner, it can be easy to forget the importance of collecting unpaid invoices.

When you take the time to sit down and look at your cash flow, your accounts receivable should always be a part of the equation.

This will remind you to collect on any unpaid invoices and to account for them in your financial plan.

See also: How to Keep Track of Payments Received

6. Know When You Can Afford to Hire a New Employee

People are essential to keep a business going, but there may be times when you can’t afford to add another employee to your payroll.

Then again, it may be the perfect time to take on a new worker to boost productivity.

The only way you will know is by doing the math and planning your cash flow. Will it be enough to cover another paycheck?

7. Keep You on Target and Moving Towards Your Business Goals

Cash flow planning can put you in a better position to plan for and reach your business goals.

It allows you to have a birds-eye view of the coming financial situation so that you are prepared to proceed with the best course of action for your profit and growth.

How to Create a Cash Flow Plan

Before you can create a cash flow plan, you need to understand forecasting. It will help you to build a more accurate and effective plan.

Cash Flow Forecasting

A cash flow forecast is a prediction of the amount of cash flow you will have in the future based on how much your business will see coming in versus going out.

Forecasting Cash Inflow

To know how much cash will be coming into your bank account, you need some data from your income statement.

You need to calculate these inputs:

  • Cash from sales or services
  • Cash from funding
    • Loans
    • Investments
  • Cash from selling assets
    • Real estate
    • Machinery
    • Vehicles

When totaled, all of those factors add up to represent your cash inflow.

Forecasting Cash Outflow

To calculate your cash going out, look at all the withdrawals made from your bank account and add these up.

They should include:

  • Operation expenses
    • Rent
    • Utilities
  • Accounts payable
  • Payroll
  • Loan payments
  • Purchases of assets
    • Buildings
    • Vehicles
    • Machinery
  • Tax payments

This YouTube video explains cash flow forecasting in a way that will solidify this concept for you.

Short-Term Cash Flow Planning

Hand holding pen typing on calculator

Short-term cash flow planning accounts for a period no longer than 90 days into the future. This is your starting point for creating a cash flow plan.

Here’s how to do it:

Step 1

First, add up all of your daily, weekly, and monthly bills. This is your monthly cash outflow.

The amount of all your expenditures for the month is your break-even number — your minimum goal to bring in for the month.

Step 2

Next, make a list of your monthly cash inflow. This will include any payments from investors, loans, tax refunds, etc.

Step 3

Then, calculate a sales forecast by averaging your sales for all prior months. When in doubt, lowball your expected sales just to be safe.

Step 4

Now, compare the numbers. Repeat for the upcoming two months.

If your outflow is higher than your inflow, plan to cut costs or increase income.

If your inflow is higher than your outflow, you’re in for smooth sailing.

Your only problem is to decide what to do with the extra cash. Will it be pure profit or used for business growth?

No matter how healthy your cash flow projections look, you should make monthly goals to increase your cash flow.

These can include:

  • Keeping inventory low
  • Cutting down on your operating expenses
  • Shopping around for a cheaper insurance policy
  • Reducing travel expenses
  • Taking out a loan or getting a line of credit if necessary
  • Putting in more effort to collect on accounts receivable

Long-Term Cash Flow Planning

Once your short-term cash flow plan is solidified, it’s time to look beyond those 90 days.

To create a long-term cash flow plan, use the same method you used for short-term planning, but account for inflow and outflow during the next 12 months.

Look for dips and spikes in your net cash flow so that you know how to proceed.

Planning for a Negative Cash Flow

If you predict a lack of cash flow, make plans to avoid it by addressing the cause.

For example, if you identify a pattern of unpaid accounts receivable, you can make some changes to speed up invoice payments in the future.

You might offer an early payment discount as an incentive. Or, you might consider instilling a late payment penalty.

It may be helpful to expand your payment options, too. If you can make it more convenient for your customers to pay their bill, you might see faster payments.

Planning for Positive Cash Flow

When you have a positive cash flow, you should put your extra capital into a savings account so it’s ready to use when unexpected cash flow shortages happen (they happen to even the healthiest businesses).

And whether your cash flow is positive or negative, you should continue to set yearly goals for increasing it.

Here are some example goals that might be on your list:

  • Increase sales by 50%
  • Outsource service to save money
  • Purchase more efficient machinery
  • Sell unpaid invoices to an alternative financing service

Adjust Your Cash Flow Plan

Cash flow planning is not a one-and-done task. As your company evolves, your cash flow plan should too.

Keeping records will help you identify seasons of increased or decreased cash flow so you can plan better.

You may benefit from the help of a financial advisor to assist with your financial management.

Alternatively, you can use software to automate your cash flow forecasting and adjust your cash flow plan to coincide with these numbers.

Quickbooks offers a cash flow management tool for small business owners at a reasonable price.

Workday Adaptive Planning and Vena are two other viable options for streamlining your cash flow management.

Related: Simple Small Business Solutions You Actually Need

If you want your business to thrive in this competitive world, cash flow planning is a necessity.

Having short- and long-term plans can help you stay in control of your finances.

You may feel like a fish out of water the first time you sit down to make your cash flow plan, especially if you are a startup, but the benefits are hard to ignore.

Regular practice can make it easier each time, and your numbers will become more accurate as you grow to understand the details of your business’s finances.

And if you’re looking to turn your unpaid invoices into working capital, contact Now today.