Cash Flow Basics for SMBs: What Every Owner Should Know

Small businesses comprise nearly 99% of all companies worldwide (OECD data). And no matter where they operate, developed markets or emerging ones, they tend to run into the same issue: cash flow. 

According to a JPMorgan Chase Institute report, the median U.S. small business holds approximately 27 cash buffer days in reserve, meaning they could cover about 27 days of cash outflows if new income stopped. 

It’s not that owners don’t care about cash flow; it’s often about not having the right tools or resources to manage it effectively. That’s why understanding cash flow basics is critical to financial health. 

What does “cash flow” actually mean? 

At its core, cash flow is simply the money moving in and out of a business. It’s one of the clearest indicators of whether a company is financially healthy enough to pay bills and keep running smoothly. 

• Positive cash flow: enough money to cover obligations and reinvest. 
• Negative cash flow: more money leaving than coming in, which can lead to missed payments or debt. 

Sometimes, negative cash flow can be intentional, for example, during a launch or a planned growth investment. But in most cases, businesses aim to stay cash flow positive. 

What are inflows and outflows in cash flow? 

Inflows are funds that enter the business, like sales revenue, loans, or the sale of assets. Outflows are payments leaving the business, like payroll, rent, or equipment purchases. 

There are also two types of flows to keep in mind: 

• Recurring cash flow: predictable, ongoing income or expenses. Examples: subscription fees (positive) or payroll (negative). 
• One-time cash flow: irregular inflows or outflows. Examples: selling equipment (positive) or paying an insurance deductible (negative). 
• Costs are further split into: 
  • Fixed costs: consistent, like rent.
  • Variable costs: changing, like utilities or raw materials. 

The golden rule: aim for recurring positive flows to outweigh recurring negative flows, while keeping a close eye on fixed and variable costs. 

What is a cash flow statement, and why is it important? 

A cash flow statement shows the money movement that goes in or out of a business over a period of time. It’s a part of the three main financial statements that are profit and loss and the balance sheet (tracks debts and assets) apar from the cash flow statement. 

The three main components of a cash flow statement are: 

• Operating activities: It tracks everyday business cash flow that could be paying bills, collecting money from customers, and covering payroll. 
• Investing activities: It shows money that is spent on or is earned from long-term assets, such as equipment, property, or business investments. 
• Financing activities: It shows loans, repayments, or money from investors and shareholders. 

What’s the difference between the direct and indirect cash flow method? 

The two main methods differ in how they calculate operational cash flow: 

• Direct method: It is used with cash accounting and tracks the actual money inflows or outflows as they happen. 
• Indirect method: It is used with accrual accounting. It starts with net income from the profit and loss statement and adjusts it by adding or subtracting the non-cash items like depreciation or changes in accounts receivable or payable. This method is easier to prepare since it uses existing accounting records. Most SMEs use accrual accounting, which means the indirect method is more common. 

How to manage and monitor cash flow effectively? 

Cash flow management requires one to regularly track and analyze the money flowing in and out of your business. Making weekly or monthly cash flow statements is beneficial to businesses to spot trends. Using these insights, you can build forecasts to predict future cash movements and compare them with actual results through your budgets. This layered approach provides a clear picture of past cash flow, helps understand future needs, and keeps your business accountable for staying on track financially. 

What’s the difference between cash flow and profitability? 

Profitability means a company is making money, but that doesn’t always mean it has healthy cash flow. 

For example: 

Lily’s bakery, Cake-and-Bake, is booming with orders. She invests in new mixers and staff to keep up. But she forgets to project incoming cash against expenses. The new costs exceed her inflows, leaving her “profitable” on paper but short on actual cash. 

• Profitability: one side of the coin. 
• Cash flow: the full picture of money coming in and going out. 

What’s the difference between liquidity and solvency? 

Both are measures of financial health, but at different time frames: 

• Liquidity: short-term ability to pay bills. Focused on current assets vs liabilities (operational cash flow). 
• Solvency: long-term ability to sustain the business. Evaluates debt vs equity (financing activities). 

Healthy SMEs balance both; they maintain short-term liquidity while building solvency for the future. 

How can Forwardly make cash flow forecasting easier? 

Spreadsheets can only take you so far. Forwardly turns your accounting data into real-time insights so you’re always a step ahead of your cash flow. 

With Forwardly, you can: 

See your cash flow clearly: a clear picture of money moving in and out so you can forecast cash flow easily 

Stay on top of daily cash: know exactly how much money is available today, not last week. 

Plan with confidence: anticipate shortfalls or surpluses before they happen. 

Save time and stress: no manual formulas, no messy spreadsheets, just quick results. 

Forwardly helps you shift from reacting to cash flow issues to controlling them. Ready to stop worrying about cash flow and start planning with clarity?