Money Management & Cash Flow

Your business is up and running and money is starting to come in. You are paying your bills and placing new orders for supplies. Things are looking pretty good, but are you really making any money? Are you actually turning a profit?

The size of your business has a lot to do with how you track your finances. But even if you are a one-person operation, a disciplined approach to money management is critical to your success. Once you adopt such an approach, it’s a fairly simple task to keep things up-to-date.

The Concept of Profit

It’s a simple concept, but how do you know if you are really making a profit? If you wait until you file your tax return to find out, it’s really too late. Most businesses track their financial performance on a weekly or monthly basis. Monthly is adequate for most small businesses and will give you the information you need to manage expenses and track your progress.

Unless you are running a nonprofit organization or group, profit is most likely your primary goal. It represents the difference between revenue and cost where:
  • Revenue = the total amount of money received for services provided and/or goods sold during a specified period of time
  • Cost = the total amount of money, resources, and time spent to provide services and/or produce a product for sale
Revenue is easy to calculate since it’s the sum of all your sales. The harder element to figure out is cost, and that’s where financial discipline is important. It’s important to note that your time is part of the cost of doing business, and you should be adequately compensated for your time. Simply put, you maximize profit by increasing revenues and decreasing costs.

Racking up Costs

The cost of doing business consists of all your expenses, and fall into two general categories: (1) direct, and (2) indirect.

Direct costs are the costs that are directly attributable to making a product or providing a service, such as design, development, wages, materials, and parts. These costs are variable in nature and change as a function of quantity, quality, and timing. As the number of units of product increases, the cost per unit should decrease as a result of efficiencies and quantity buys for raw materials.

Indirect costs are referred to as overhead and are not attributable to the product cost itself. Examples are employee benefits, capital expenditures, rent, advertising, vehicles, equipment maintenance, loan payments, utilities, office supplies, telephone, and office furnishings. These costs remain relatively fixed and predictable and won’t change significantly unless your production capacity is measurably increased or decreased.

To accurately measure profit, the total costs must be understood and accounted for on a monthly basis. Since material purchases and other direct costs may not occur every month, it’s important to view cost and profit over an extended period so that the trend can be analyzed.

Money Management

To figure out how your business is doing, you should have a budget that is time-phased by month. Compare your actual costs versus the budget and analyze variances. Gross profit can be calculated by subtracting costs from your total receipts or incoming revenues. If costs exceed revenues, then you are losing money and need to evaluate possible corrective actions. While tax write-offs might minimize your loss, you don’t want to wait until tax time to assess the situation.

There are automated tools that can help you track your finances and you can find them by doing an internet search. A few are listed here, but their mention does not constitute an endorsement by the author or publisher of this article. You should do your own research to find what works best for you and your specific business model.

Microsoft offers useful spreadsheets at this link: These are relatively straightforward and easy to use. If you want a more sophisticated capability, there are programs available such as: Budget Maestro (, Microsoft Dynamics (, and Cognos TM1 (

These tools will assist you in preparing budgets and providing operating data needed to successfully manage your business. If you opt for one of the programs that you have to buy, see if they offer a free trial.

Cash Flow

Cash flow is the movement of cash into or out of your business. It’s obviously to your advantage to increase the rate that money comes in, while slowing the rate it goes out. There’s an old saying that “cash is king” and this is especially true for a growing small business. Improving cash flow is one way to maximize the effective utilization of the money needed to keep your business on the right track.

While managing cash flow can get complicated, there are basic things you can do to improve it:
  • Forecast your cash flow and track actual performance against the plan
  • Set payment terms that allow you to be paid on delivery or as soon as possible for the products you sell
  • Consider offering discounts to customers that pay you immediately in cash
  • If you invoice for payments, make sure they are timely and monitored until paid
  • Negotiate payment terms with your suppliers that allow you to delay payment to them for as long as possible
  • Use electronic funds transfers which allow you to pay on the due date and not before
  • If you are owed money, take prompt action to collect it
  • Improve the speed and efficiency at which you turn raw materials into products
  • Keep your inventory as low as possible but still meet expected demand
Bottom Line

At one time or another, most businesses face a cash flow crunch in spite of their good planning and execution. This is when it pays to have a good relationship with your bank and an established line of credit to get through the tough times. It also pays to have the respect and trust of your suppliers because they may be willing to help by delaying payment of what you owe them.

When choosing suppliers, the cheapest may not always be the best. Carefully evaluate and compare payment terms because they can make a substantial difference in your ability to manage your cash flow.

Good planning can go a long way toward ensuring your business will make money. Pay attention to the details and you’ll be successful.

Michael Sanibel is a freelance writer specializing in business, marketing, personal finance, law, science, aviation, sports, entertainment, travel, and political analysis. He graduated from the United States Air Force Academy and is also licensed to practice law in California and New Hampshire. Michael wrote this feature article exclusively for Debbie (, an organization dedicated to helping small businesses succeed.