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How to Prepare Your Small Business for Cash Flow Needs

In this series, we’ve been examining financing options and pitfalls through two rival small businesses – Callie’s Cupcakes and Buddy’s Bakery. The owners have joined us to learn about different types of interest, different fees that could affect their businesses, importance of keeping cash in the bank and debt serviceability ratio.

But one issue each business could potentially face at any given moment is cash flow problems. Cash flow is loosely defined as: money coming into and going out of a business that often affects its liquidity. But what does that mean in the real world for small businesses like Buddy’s and Callie’s?

For them, one serious roadblock they might be hitting is an inability to clearly define what cash flow problems are. They also might not know exactly what issues their businesses could potentially be facing. So, let’s begin by taking a look at the three main types of cash flow:

Operational cash flow:

This is defined as the cash flow that comes from what are considered the “operating activities” of a business. This can include core business activities, such as manufacturing, distributing, marketing and selling. Operating activities provide most companies with their cash flow and determine the profitability of a company. So, in the case of each business, operational cash flow has a hand in what it takes for them to whip up and sell a batch of baked goods.

Investment cash flow:

This is a company’s gains or losses from investments in financial markets or operating subsidiaries. Changes to investment cash flow result from amounts spent on capital assets such as buildings, vehicles or investment properties. For Callie’s Cupcakes, the recent addition of catering and delivery services required the purchase of another van. This ultimately impacts the company’s investment cash flow.

Financing cash flow:

These are transactions with owners and lenders. They provide funds to a company or return funds to an owner or lender. Examples include sales or repurchases of stock, debt issues (bonds), debt repayment, dividend payments or contributions by donors for restricted long-term use. Buddy has run his business since he was 21. He continues to be helped, in part, thanks to a generous donation to the business by a grandparent, which impacts the bakery’s financing cash flow.

Understanding cash inflows and outflows at a business can assist greatly when it’s time to put together a cash flow analysis statement. This document is a breakdown of what funds go in and out of the business and can be presented as a backing when it’s time to seek financing. To gather this information, it is key to track the inflows and outflows of a business.


Defined as money that comes in via operations including sales of goods or services. Inflows can also come in through loans, lines of credit or asset sales.


Defined as money that goes out during operations through business expenditures, loan payments or business purchases.

Inflows and outflows can be compiled on a quarterly basis and come in handy to determine any projections for a business’ future cash flow trends. A comprehensive analysis can also assist in pointing out any potential speed bumps or unforeseen issues pertaining to the business’ income and expenses.

Finally, business owners should also stay mindful that one hidden gem that might not be getting proper attention. It comes in the form of past due receivables. Those nagging invoices out in the ether that have yet to be resolved provide a tricky moment for a business owner to navigate. But the truth is, they can add up quickly over time. In the case of Buddy’s Bakery, after doing an in-store audit of outstanding invoices, he discovered that he had over $10,000 in unpaid invoices.

Buddy wants to continue the relationship with these clients, but resolving their nonpayment can be a difficult task. So, it might be time for him to offer up a few incentives. One way he can bridge the gap is to reach out and attempt to strengthen the relationship. Once a starting point has been achieved. Offering them incentives such as reduced fees, or interest (if charged) for a past due invoice, could also help for future transactions.

Buddy and Callie have learned a lot about their cash flow needs through their business dealings. They’ve also learned about financing their businesses in general; this way they can take advantage of great opportunities when they come along.


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