Cash Flow Management 101: A Primer for Beginners

Cash Flow Management 101: A Primer for Beginners
Solid cash flow management is key to keeping your business operating smoothly.
by Square Jan 13, 2025 — 5 min read
Cash Flow Management 101: A Primer for Beginners

Cash flow is the lifeblood of a business. To keep it operating smoothly, it’s essential to ensure you have more money coming in than going out.

While effective cash flow management is fundamental to a business’ success, it’s not uncommon for business owners to struggle with cash flow problems. Understanding cash flow basics, such as planning and cash flow statement analysis, can help you run a business with long-term financial sustainability.

In fact, according to data from the Bureau of Labor Statistics (BLS), around 20% of small businesses fail within the first year, and 65% fail by the tenth year. Cash flow management is a common reason for these failures.

In other words, you’re not alone if you’re worried about cash flow. But if you learn more about cash flow forecasting and use cash flow management software, you’re on track to run a durable business with long-term staying power.

To help you manage cash flow effectively, we’ve compiled tips on ensuring your business’s financial health.

What is cash flow management?

Let’s start with the definition of cash flow management. Cash flow management refers to tracking money as it moves in and out of your business. By tracking these funds, you can forecast how much money will be available to your business.

To help you manage your cash flow, it’s critical to reference your cash flow statement, which reports the cash generated and spent during a specific accounting period. Cash flow includes all parts of your business, such as operations, investing, and financing.

Why cash flow is important

It’s important to pay close attention to cash flow each month to ensure you have sufficient cash on hand to pay operating expenses such as payroll and suppliers. If you don’t have access to cash, you can end up with unpaid bills or late employee paydays.

To avoid this, you should carefully manage your cash flow each month and focus on creating a positive cash flow, meaning more money enters your company than leaves it each month.

A cash flow statement gives you insight into where money is coming from, when it’s coming in, and how it’s being spent so you can analyze your company’s financial status and budget for the future.

Cash flow statements 101

A cash flow statement is a crucial financial tool that shows how cash moves in and out of your business over a specific period. It tracks cash inflows like sales or loans and outflows like rent, payroll, and inventory. Unlike a profit and loss statement, it focuses solely on actual cash, giving you a clear picture of liquidity.

Traditionally, cash flow statements have three sections: operations, investments, and financing. For example, if your business takes on new debt you plan to use (for things such as equipment, business expansion, etc.), you would likely have a positive cash flow in the financing section. When you repay the debt, there is a negative cash flow in the financing section.

This statement helps monitor your business’s financial health by identifying trends and potential cash shortfalls. For instance, it can reveal seasonal fluctuations or periods where expenses outweigh revenue. You can take proactive steps to maintain stability by spotting these patterns early.

Your cash flow statements are one of the most important tools for tracking cash flow for your small business. Square also offers helpful reports to help you better understand your cash flow.

4 common misconceptions of cash flow management

When it comes to cash flow management, there are a few common misconceptions that can be misleading for business owners, including:

What causes cash flow problems?

There are a number of issues and bad business decisions that can negatively affect cash flow and increase business risk. Some of the most common causes of cash flow problems are:

Consistently negative cash flows can lead a business into a situation where it can’t pay the bills and ultimately must file for bankruptcy. Check out our cash flow management template for an example you can use for your small business to identify and avoid cash flow problems.

Final tips to improve your cash flow

To avoid cash flow issues altogether, it’s best to use proactive cash flow management strategies and tools:

By incorporating these preemptive measures, you can take charge of your finances and guarantee a healthy cash flow for your business.

Square
The Bottom Line is brought to you by a global team of collaborators who believe that anyone should be able to participate and thrive in the economy.

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