Level 10 · Part 3
Cash flow: when money comes in and goes out
A business can be profitable on paper and still run out of cash. Plan the timing.
Cash flow means the money you actually receive and pay, and when. Profit is what is left over after costs. Cash flow is whether you have the money in your hand on the day you need it.
| Week 1 | Week 2 | Week 3 | Week 4 | |
|---|---|---|---|---|
| Money in (sales) | 0 | 0 | 0 | 120 |
| Money out (costs) | 50 | 30 | 20 | 10 |
| Change in cash | -50 | -30 | -20 | +110 |
| Cash at the end of the week (start with 70) | 20 | -10 | -30 | 80 |
In this example the business ends the month with more cash, but in weeks 2 and 3 the cash goes below zero. It needs extra working capital or a way to be paid earlier, otherwise it stops before the sale arrives.
- Plan month by month or week by week, and write down expected money in and out.
- Find the weeks where cash goes below zero and plan what you will do.
- Ways to ease a gap: ask for a part-payment in advance, agree shorter payment terms, buy materials in smaller lots, start with smaller batches, or ask suppliers about timing.
- Compare the plan with what really happened, and adjust.
Keep business money separate
Use separate notebooks or accounts for the business and the household if you can. Mixing them hides the true state of the business.
Exercise 10.3 · My four-week cash-flow plan
- Write the cash you have now.
- For four weeks, write the money you expect in and out, with your own figures.
- Mark any week where the cash goes below zero.
- Write two things you could do to avoid or reduce the gap.
Background reading for this part:
- Start and Improve Your Business (SIYB) — International Labour Organization (ILO)
- RuralInvest: Fostering Access to Finance for Small-scale Entrepreneurs — Food and Agriculture Organization of the United Nations (FAO)