Cashflow management - the basics


Balance sheets, profit and loss accounts, financial forecasts - all terms you will need to understand to run your own business successfully.

Managing the cash in and out of your business is basic but there are principles to follow. Financial and management accounts are more detailed and may require an Accountant.

For both, you still need to understand how much money you have, know how you plan to use it and make sure records are kept for payments in and out.

Cash allows a business to survive and prosper and is the primary indicator of business health.

While a business can survive for a short time without sales or profits, without cash it will die.

For this reason, the inflow and outflow of cash need careful monitoring and management.

This guide:

  • looks at the key elements of cashflow
  • looks at at how effective cashflow management will help protect the financial security of your business
  • outlines the steps that you can take when dealing with your customers, suppliers and stakeholders to improve cashflow
  • highlights common cashflow problems and how to avoid them


Cashflow is the measure of your ability to pay your bills on a regular basis.

It depends on the timing and amounts of money flowing into and out of the business each week and month.

Good cashflow means that the pattern of income and spending in a business allows it to have cash available to pay bills on time.

Your available cash includes:

  • Coins and notes
  • Money in current accounts and short-term deposits
  • Any unused bank overdraft facility
  • Foreign currency and deposits that can be quickly converted to your currency

It does not include:

  • Long-term deposits (if these cannot be withdrawn)
  • Money owed by customers
  • Stock

Difference between cash and profit

It is important not to confuse cash balances with profit.

Profit is the difference between the total amount your business earns and all of its costs, usually assessed over a year or other trading period.

You may be able to forecast a good profit for the year, yet still face times when you are strapped for cash.

The importance of cash

To make a profit, most businesses have to produce and deliver goods or services to their customers before being paid.

No matter how profitable the contract, if you don't have enough money to pay your staff and suppliers before receiving payment from your customers, you'll be unable to deliver your side of the bargain or receive any profit.

To trade effectively and be able to grow your business, you need to build up cash balances by making sure that the timing of cash movements puts you in a positive cashflow situation overall.

Bear in mind that having a lot of cash in your bank does not necessarily make good business sense.

If you do not need to use it immediately, put spare cash into an account where it will earn a higher rate of interest, or use it as capital for short-term investments.

Get advice from your bank, accountant or financial adviser.