The #1 Ingredient for a healthy business: Cash-Flow Management

There are several areas of a business that need to be managed—workflow, staffing, sales and marketing, to name a few.

But what’s arguably the number one area? The key that determines whether your business will survive and thrive, even when sales are down? 

Knowing how much money goes into your bank account, how much flows out of it, and how to manage this flow.

Aka cash-flow management. 

In the context of cash flow, “management” means to be in control. 

Why is it so important to be in control of your cash flow?

Cash-flow management is imperative not only to make wise financial decisions for a healthy and thriving business, but also to make sure you even have your business. 

In another post, we mentioned that only about 60% of small businesses make it to their fifth birthday. Unfortunately, the survival rate decreases as time goes on. The majority of businesses are dead by year 10 (52.2% precisely, according to the Government of Canada’s Key Small Business Statistics published January 2019)

So what do business owners tend to get wrong about cash flow, contributing to the demise of so many businesses?

One problem is that we too often forget that “cash” is totally different from “accounts receivable.”

So remember: Accounts Receivable ≠ Cash.

To be a cash-flow management pro, you need to know what and how much cash you have to spend today. 

Business owners will often rely on the annual Profit & Loss statement (P&L), but that gives you stale information. 

You might look at it and say, “Yay! I made $50,000 last year!” 

But that $50,000 net profit could include bills to pay and/or outstanding (unpaid) customer invoices, so it isn’t money in your bank. 

You can spend cash, but if you haven’t yet received payment for customer invoices — i.e. accounts receivable — you do not have that money. 

Sounds straightforward, but in practice, business owners will often make spending decisions based on the total they’ve invoiced, rather than the reality of what their bank balance looks like. 

Yes, it’s exciting to have landed that big project promising a payment with more zeros than you’ve seen in a while. But please, don’t depend on that one-off big invoice when you make your business spending decisions.  

Hope is a bad business plan.

A simple way to move from a hopeful business to a wise business is by subtracting the accounts receivable (the total unpaid customer invoices) from that $50,000 net profit.

So if, for example, you have $100,000 of accounts receivable and your P&L says $50,000 net profit, you’re actually $50,000 in the hole… which means you most likely went into debt to pay some (or many) of your expenses. 

Being hopeful is great, unless it is the basis on which you are making financial choices.

And if you are not keeping tabs on your business bank account(s), just like you should be doing with your personal bank account, that is exactly what you are doing — basing your financial decisions on hope.

So instead, keep on top of your company’s cash flow to give you the knowledge you need to determine…

  • whether you are bringing in enough sales to cover your expenses, 
  • whether you’re overspending, and
  • where to cut back.

Here are some basic cash-flow management calculations you can use to get started:

#1. Start with your online bank balance
#2. Deduct the following amounts:
  • automatic withdrawals coming up within the month
  • tax obligations due within the month (payroll remittances, corporate tax instalments, quarterly GST payments)
  • any cheques you used to pay expenses but have not yet been deposited (yes, I know some of you nostalgic few are still using cheques)
  • Your monthly buffer — 10–12% of your monthly income so that you’re prepared for a drop in income or any emergency or one-off expenses (the goal is to accumulate 3–6 months of expenses as an emergency fund).
#3. Add any regular monthly deposits that you receive from customers.

Note that “Regular” means automatic deposits and monthly customer payments you have been reliably receiving for at least the last six months, give or take. Even if you’re expecting payment for a particular job you just invoiced for, don’t add it in until you see it in the bank (where it will be included in Step #1).

Make sure to look at your numbers every week and be aware of how much cash you have to spend in light of upcoming expenses before you indulge in any extra spending (the business paying for your vacation, taking the staff out for a steak dinner, giving your employees a raise, etc.). 

If you have money left over, great! That means you can set aside money for other upcoming expenses, pay off loans, or purchase any large equipment to invest in your company.

If the numbers came out in the red, then you know you’re overspending and it’s time to look at ways to cut back expenses or increase your income. 

We hope that 2020 is the year that you become a master of your cash flow.

Because we want you to have the peace of mind that comes with the financial freedom to pay what needs paying, to invest strategically, and maybe even to give generously. 

And at the end of the day, you still have to pay the tax man.

Check out some of these resources:


  • Profit First by Michael Michalowicz
  • Profit First for Contractors by Shawn Van Dyke
  • The E-Myth Chief Financial Officer | Why most small businesses run out of money and what to do about it by Michael Gerber

Cashflow apps that integrate with QuickBooks Online:

Web Resources:

  • How to be debt-free (and Worry Free) | Our Comprehensive Guide by Credit Canada
  • 9-minute summary of best-selling personal finance book, “Rich Dad Poor Dad”

GuYDanS Manages Cash-Flow

If you would like some additional guidance, GuYDanS is here for you.

The #1 Ingredient for a healthy business: Cash-Flow Management

In your corner,

The GuYDanS Team