3 steps to measure, monitor and manage cash flow

By Lucas H. Parker

Keeping up to date and monitoring your cash flow is one of the primary business metrics in any industry. Cash and the way you manage it can make or break a business. Cash flow statement shows how a company manages and manipulates its capital, mainly money and cash outflows. It also includes management of cash shortfalls or surpluses as they will inevitably occur.

The importance of this metric can be seen in the data that about 82% of businesses that fail have, in some way, mismanaged or misunderstood their cash flow. While it is any business owner’s dream to never have financial problems, for most of us it is not a realistic scenario. The globalized market of today is highly volatile and shifts fast. The sooner we diagnose those problems the better, as we have more time to manage the situation. If you have doubts about your own capabilities in this area but you’re not yet at the size where you can afford a full-time CFO, then contracting with one of the interim cfo firms might be a good option.

Here are key points to go over when it comes to your cash flow.

– The basics

First of all, what exactly is cash flow and how do you differentiate it from other similar metrics? To put it simply, it is the amount of cash moving in and out of your business in a given time frame. Such movements come in various different forms such as direct, immediate cash transactions. For example, when a customer is handing you money for a product or service. Another example is cash being deposited into your account or you repaying a vendor. Therefore, we can simply make two distinct entities: Accounts Receivable and Accounts Payable. The former is your outstanding customer payments, something like a charge account for frequent customers. These are factored into your cash flow assessments. The latter is the amount of money you have due for expenses. These can include but are not limited to: rent, loans, taxes, etc. These are the big cash withdrawals that your company has to take into account.

In the end, you want to have a positive cash flow. What this means is that more money should go in, rather than going out of your business. One of the most common mistakes businesses make is overdrawing their accounts. This incurs additional costs down the line.

The importance of cash flow statements

There are two forms of accounting. Accrual accounting is used by public companies. Here, revenue is reported as income when earned, rather than when payments are received. Also, expenses are reported when they incur even if no cash payments have been made.

Here is an example: a company records a sale and the revenue is recognized on the income statement. The company, however, may not receive the actual cash until sometime after. From an accountant’s standpoint, the company has earned a profit and will be paying income taxes on it. It is a common practice for businesses to extend terms of thirty, sixty, or ninety days for a customer to pay the invoice.

On the other hand, we have cash accounting. This is an accounting method in which payment receipts are recorded when they are received. Expenses are recorded in the period in which they are actually paid. Simply put, revenues and expenses are recorded when cash itself is received and paid, respectively.

It is worth noting that profitable companies can fail to adequately manage their cash flow. That is why cash flow statements are a critical tool for analysts and investors. Cash flow from operations, investing, and financing are three distinct sections of any such statement. The first one is reporting the amount of cash from the income statement that was reported on an accrual basis. The second one records the cash flow from sales and purchases of long-term investments. These include fixed assets like property and equipment. Finally, the third one reports debt and equity transactions. For more information and insight, you can contact a reputable accounting firm, like the IMT Accountants & Advisors for example.


A cash flow of a company is a number that appears as net cash provided by operating activities or “net operating cash flow.” The following indicators will provide a starting point for an investor to measure the investment quality of a company. Net sales are a ratio that is expressed as a percentage of a company’s operating cash flow to its net sales or revenue. It tells us how much money is generated for a certain amount of cash of sales. Free cash flow is a net operating cash flow without capital expenditures. It is an important measurement as it shows how efficient a company is at generating cash. Finally, comprehensive free cash flow coverage can be calculated by dividing the comprehensive free cash flow by net operating cash flow. Basically, the higher the percentage, the better it is for the company.

At the bottom line, free cash flow is an important indicator and measurement for small business owners. It is a measurement that captures all the qualities of internally produced cash and monitors the use of it for capital expenditures. Now that we know all the basics, we can make our own assessments or hire professional help, depending on the requirements of our business.


Lucas H. Parker is a business consultant with a passion for writing. Doing his research, exploring and writing are his favorite things to do. Besides that, he loves playing his guitar, hiking and traveling. You can find him on Twitter, Facebook and Linkedin.

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