Have you ever heard of a company that had plenty of customers, good sales figures – and still went under? The reason is often simple: they ran out of money in the account. Not profit – money. That difference is the essence of the cash flow concept. In business jargon there is a well-known saying: “Profit is an opinion. Cash flow is a fact.”
In this article we explain what cash flow is, why it matters more than profit, how to calculate it, and – most importantly – how to manage it so that your business stays liquid and healthy. Written simply, for entrepreneurs, not for accountants.
What is cash flow?
Cash flow is simply the difference between the money that comes into your business account (inflows) and the money that leaves it (outflows) over a given period (month, quarter, year).
- Positive cash flow – more money comes into the account than leaves it. You have a surplus – you can invest, save, or grow.
- Negative cash flow – more money leaves the account than comes in. You are running out of cash – this is an alarm for a liquidity crisis.
The formula is simple:
Cash flow = Inflows (income into the account) – Outflows (payments from the account)
Cash flow vs. profit – why they are not the same
This is the most important lesson every entrepreneur must understand. Let us look at an example.
Example: freelancer Maja
Maja is a web designer. In January she completed a project for a client worth €3,000. She issued the invoice on 15 January with a 30-day payment term. At the same time she had €1,500 in costs (accounting, coworking, equipment, contributions).
| Profit (January) | Cash flow (January) | |
|---|---|---|
| Income | €3,000 (invoice issued) | €0 (not yet paid) |
| Costs | –€1,500 | –€1,500 (paid immediately) |
| RESULT | +€1,500 profit | –€1,500 negative cash flow |
On paper Maja has €1,500 in profit – but her account has €1,500 less than at the start of the month, because the client has not yet paid. That is the difference between profit and cash flow. If this repeats for several months in a row, Maja cannot pay her bills – even though she is “profitable”.
Why do profitable companies fail?
The statistics are alarming: by some estimates, up to 82% of small businesses fail precisely because of cash flow problems, not a lack of profit. The most common scenarios:
- Late client payments – clients pay in 30, 60, or 90 days – but you have to pay contributions, rent, and your accountant immediately.
- Expanding too quickly – you invest in equipment, staff, or marketing before you have a stable inflow of cash.
- Seasonal fluctuations – some industries have strong seasonal swings (tourism, construction). Without a reserve for the “dead” months, problems can arise quickly.
- Not invoicing on time – if you issue invoices late, payments will arrive even later.
3 types of cash flow you need to know
1. Operating Cash Flow
The money your company generates from its core activity – selling products or services, minus payments to suppliers, employees, and operating costs. This is the most important cash flow, because it shows whether your business itself generates money.
2. Investing Cash Flow
Money spent on buying or selling long-term assets: equipment, computers, vehicles, real estate. It is usually negative (because you are investing), but in the long run it contributes to growth.
3. Financing Cash Flow
Money from external sources: loans, investments, grants. And money you pay back: loan instalments, dividends. For startups this flow is often positive at the start (financing), then negative (repayment).
7 tips for better cash flow in a small business
- Invoice immediately – do not wait. As soon as the work is done, issue the invoice. Every day of delay is a day without money in the account.
- Shorten payment terms – instead of 30 days, offer 14 days. Offer a 2–3% discount for early payment.
- Ask for advance payments – for larger projects, request 30–50% up front before starting work. This drastically improves your cash flow.
- Control costs – before buying anything, ask yourself: do I really need this now? Keep fixed costs as low as possible.
- Keep a cash reserve – ideally: 3–6 months of fixed costs in a separate account. This is your “safety cushion”.
- Track cash flow weekly – not monthly, but weekly. A simple spreadsheet with inflows and outflows is enough to start.
- Optimise fixed costs – instead of your own office, choose a coworking space (from €135/month, all-inclusive). Instead of buying equipment, rent it. Every euro saved improves your cash flow.
A simple cash flow calculation for a freelancer
Let us look at a concrete monthly cash flow for a typical freelancer in Ljubljana:
| INFLOWS (money into the account) | Amount |
|---|---|
| Payment from client A (December project) | €2,500 |
| Payment from client B (monthly subscription) | €800 |
| TOTAL INFLOWS | €3,300 |
| OUTFLOWS (payments from the account) | Amount |
|---|---|
| Social insurance contributions | €400 |
| Accounting | €80 |
| Coworking makerSP_CE | €135 |
| Software (subscriptions) | €50 |
| Phone and internet | €40 |
| Income tax prepayment | €200 |
| Other costs | €95 |
| TOTAL OUTFLOWS | €1,000 |
| CASH FLOW (Inflows – Outflows) | +€2,300 |
In this example cash flow is positive (+€2,300), meaning the freelancer has €2,300 left in the account after all payments. But beware: if client A pays late, cash flow immediately drops by €2,500 – and becomes negative (–€1,200). This is why managing cash flow is so crucial.
What to do if cash flow is negative?
- Contact debtors immediately – send a reminder for unpaid invoices. Be professional, but firm.
- Cut costs – review all fixed costs and eliminate those that are not essential.
- Speed up inflows – offer a discount for immediate payment. Request advances for new projects.
- Consider factoring – selling receivables (unpaid invoices) to a factoring company that immediately pays you 80–90% of the value.
- Use short-term credit – an overdraft on the account or a short-term loan to bridge the liquidity gap.
Tools for tracking cash flow
- Excel / Google Sheets – simple, free. Create a table with columns: date, description, inflow, outflow, balance.
- Čebelca BIZ – a Slovenian accounting tool with a simple cash flow overview.
- Minimax – a more advanced accounting program with automatic cash flow calculation.
- Float / Pulse – specialised cash flow programs for cash flow forecasting.
Frequently asked questions about cash flow
Is cash flow the same as profit?
No. Profit is an accounting concept (income minus costs), while cash flow is the actual flow of money in your account. A company can be profitable and at the same time out of cash – which is extremely dangerous.
How often should I check cash flow?
For beginners: at least weekly. Once the business stabilises: monthly, with a forecast for the next 3 months. For larger companies: daily.
What is the most common reason for negative cash flow?
Late client payments. Clients pay in 30–60 days, but you have to pay contributions, rent, and your accountant immediately. The solution: request shorter payment terms and advance payments.
Do I have to submit a cash flow statement to the tax office?
For sole proprietors with flat-rate expenses: no. For companies and larger businesses: yes, the cash flow statement is part of the annual report. Your accountant prepares it as part of the annual close.
How does cash flow affect my creditworthiness?
When approving loans, banks increasingly look at cash flow, not just profit. A stable positive cash flow is a strong signal that you will be able to repay a loan.
How large a cash reserve should I have?
Recommendation: 3–6 months of fixed costs. For a freelancer with fixed costs of €1,000/month, that means €3,000–6,000 in a separate account. This is your safety cushion for unexpected situations (losing a client, a late payment, illness).
Conclusion: Cash flow is the oxygen of your business
Profit tells you whether your business is theoretically successful. Cash flow tells you whether you will still be able to pay your bills tomorrow. For small business owners, freelancers, and startup founders, understanding and managing cash flow is the most important financial skill you can develop.
Start simple: every week, review how much came into the account and how much went out. Keep records. Plan ahead. And if you need help with the financial part of a business plan, read our article What is a business plan, or – if you are still thinking about how to start a business from scratch – our other guides.
For a productive work environment at the right price, we invite you to the makerSP_CE coworking space – from €135/month, all-inclusive. Write to rezervacije@makerspace.si or call +386 30 393 405.
Note: this article is not financial advice – for specific situations, consult an accountant.
💰 Cash is king. Manage it wisely.
makerSP_CE | €135/month | All-inclusive | Optimise your fixed costs