Cash flow is the heartbeat of any business, ensuring that there’s enough liquidity to cover daily expenses, make informed decisions, and secure future growth. In other words, it’s what keeps the doors open each day. While cash flow tracking might seem complex, it doesn’t have to be. By breaking down the process into a few key steps and applying some best practices, businesses can manage cash flow effectively and efficiently.
In this guide, we’ll walk through the essentials of cash flow tracking—including the concepts of operational cash flow and free cash flow—and share best practices to help make this process work for your business.
Step 1: Understand Cash Flow Basics
Cash flow refers to the movement of cash in and out of your business and is slightly different from sales and expenses from your day to day operations. In today’s economy, many transactions involve electronic payments, which often take a few days to process and appear in your bank account. Tracking cash flow means recording both inflows (money coming in) and outflows (money going out) from your bank account. This process helps businesses project cash shortfalls, identify potential problems, and avoid overextending in the short term. The result of inflows and outflows are known as operational cash flow and free cash flow.
Operational Cash Flow is the cash generated by core business operations over a specific period. It includes sales revenue minus the cash outflows needed to operate the business, such as payments for suppliers, rent, and overhead costs.
Free Cash Flow is operational cash flow minus any cash distributions to owners or investors. Free cash flow represents the cash available for discretionary spending or investments that support future growth.
Step 2: Choose the Level of Detail Based on Strategy
Companies can choose to track cash flow with either a detailed statement that itemizes every inflow and outflow, or a general overview. When deciding on the level of detail, consider your business’s strategy for using this report—this will guide how complex it should be.
In our experience, complexity can reduce effectiveness. Starting with a simple report and adding layers over time is often the most practical approach. This way, you build a process that’s manageable and scalable.
Consider the following questions as you decide on your approach:
Frequency: Will you track cash flow daily, weekly, or monthly?
Inflows: Will you track all deposits as one or break them down by revenue segment (e.g., products or services)?
Outflows: Will you track all outflows as one or by expense category (e.g., payroll, overhead, credit card payments)?
Projections: Will you include budgeted or projected amounts to forecast future cash needs?
Step 3: Track Inflows and Outflows Consistently
Once you’ve chosen your strategy, begin tracking bank deposits as inflows and check/electronic payments as outflows. Always base your tracking on bank account data, not your accounting system, because bank accounts reflect real-time cash flow.
The timing for tracking is up to you, though we recommend doing it weekly for consistency. By consistently recording cash flow, you’ll gain insight into whether each period has a net inflow or outflow, and patterns will start to emerge over time.
Step 4: Analyze the Data and Make Informed Decisions
To make the most of your cash flow data, create visual summaries, such as graphs or charts, which can help you spot trends and anomalies. Using rolling averages (e.g., three, six, or twelve months) can also smooth out fluctuations and provide a clearer picture of overall trends. Depending on the complexity of your cash flow, you might track the following:
Operational Revenue Trends
Operational Expense Trends
Payroll Trends
Future Projected Cash Needs
Allocation of Future Capital
Actual vs. Projected Outcomes
Summary
Tracking cash flow effectively allows businesses to plan for future growth, manage daily operations, and make better financial decisions. Designing your cash flow report based on a strategy and understanding the basics of inflows, outflows, companies can simplify cash flow tracking and benefit from meaningful insights.
Still not sure how to get started? Try our free cash flow report, which makes it easy to get started with tracking cash flow effectively.
About the Author:
Chris Royer, founder of Lowcountry Financial Services and a Certified Public Accountant (CPA), has been helping businesses grow and scale since 2012 by utilizing data-driven insights to enhance operational efficiency and achieve success. Chris believes that when businesses thrive, overcome challenges, and foster long-term prosperity, they not only contribute to society but also create employment opportunities for generations.
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