Cash flow explained

Why cash differs from profit

A profit and loss statement records revenue when invoices are issued and costs when they're incurred. Cash flow records actual money in and out. They diverge because of timing differences:

• Customers pay 30-60 days after you invoice them
• You pay suppliers on different terms
• Capital purchases hit cash immediately but depreciate over years on the P&L
• Tax payments come months after the period the tax relates to

A profitable business can run out of cash if it grows too fast or its customers pay too slowly. This is the #1 cause of small business failure.

Three types of cash flow

• Operating cash flow: cash from day-to-day business activity
• Investing cash flow: cash used for or generated by buying/selling assets
• Financing cash flow: cash from loans, dividends, share issues, repayments

Simple cash flow forecast

The most useful tool: a rolling 13-week cash forecast.

1. List expected receipts week by week (broken down by customer if helpful)
2. List expected payments week by week (rent, salaries, suppliers, tax)
3. Calculate weekly net cash movement
4. Track running cash balance vs. minimum buffer

Update weekly. The forecast becomes more accurate as it nears, and gives you 13 weeks of warning if things deteriorate.

Habits that protect cash

• Invoice the day work completes — not at month end
• Set clear payment terms (30 days is standard; you can ask for less)
• Chase overdue invoices systematically
• Keep a cash buffer of at least 1-3 months of operating expenses
• Reserve for big tax bills monthly — don't be surprised by them