The Art of Cash Flow: Tackling the Lifeblood of Your Business

A Virtual CFO’s step-by-step guide for service-based businesses.

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Over the next seven minutes or so, you’ll read about the power of cash flow in a service-based business.

I’ve spent the better part of 15 years as a Virtual CFO, helping service-based businesses boost their financial health with stronger forecasting and cash flow management.

In this article, I plan to answer the following five questions:

  1. What is cash flow?
  2. Isn’t cash flow the same as profit?
  3. How much profit do I need?
  4. How often should I be tracking cash flow?
  5. How should I manage my cash flow?

Giddy up. Let’s get started…

They say cash is king.

When I chat with business owners though, I make one modification, just to be clear.

It’s not cash that’s king. It’s cash flow that is truly king. Without healthy cash flow in your business, there is no king. Without a king, there is no kingdom, and heck, with no kingdom to rule, you might as well throw in the towel and start working for someone else.

Wouldn’t this be a nice faucet to have?

What is cash flow?

By definition, cash flow is quite simple. It’s the movement of funds in and out of your business. When you have more cash flowing in than out, you have positive cash flow. When you have more cash flowing out than in, you have trouble!

Cash flow is the life force of your business. It fills the well. It powers the battery. It fuels the tank. OK, I’ll quit with the metaphors for a while :)

Isn’t cash flow the same as profit?

Not at all.

The difference between cash flow and profit is the difference between success and “Oops, where did my cash go?” Often I see businesses that are very profitable but have serious cash flow problems. Understanding the timing of cash flow is extremely important.

Profit is the money left once you subtract your expenses from your revenue. And of course, it includes a bunch of non-cash accounting stuff like depreciation and interest. It does not include two major culprits : (1) Loan payments and (2) Owner’s distributions.
Cash flow refers to the actual movement of money within a business. Essentially, it’s the inflow of money into your business minus the outflow of money from your business. When we think about cash flow, we keep things simple and ignore any other kind of accounting terminology.

Profit very rarely tells the full story.

If your business is growing, you’ll need to make strategic investments — additional salary, supplies, hardware/software upgrades, etc. — and you’ll likely need cash on hand to make those investments before being able to bring in additional revenue to support those new costs.

Your company may be profitable on paper, but if you’re not paying attention to cash flow, you may be stagnating…or slowly going out of business without knowing it.

Profit is how much money you have left (on paper) after you subtract your expenses from your revenue, but cash flow is when you actually get and pay the cash in your business.

Profit drives a strong cash flow.

OK, so how much profit do I need?

In my career as a Virtual CFO, I’ve generally found that for a company to have strong cash flow (and therefore to have a solid, financially healthy business), the company needs to maintain at least 10% pre-tax profit as a percentage of revenue. Keep in mind 40% of that profit goes directly to Uncle Sam.

So, if you run a service-based business and bring in $1 million in revenue, if your pre-tax profit (all sales less all costs) isn’t at least $100,000, you might not be in a good spot.

But don’t fool yourself!

I see many companies where the key shareholder underpays him or herself and over-reports pre-tax profit. The 10% pre-tax profit as a percentage of revenue should already be adjusted for your paying yourself a fair market salary, otherwise you’re not telling the right story.

Getting these ratios right is a fundamental component of running a successful business, and tracking your cash flow on a regular basis can help get you there.

How often should I be tracking my cash flow?

Short answer? Every day. Or, at a minimum, once a week.

Sure, you might already be looking at a cash flow statement once a quarter or once a year, but that’s just a static snapshot. You’re reacting to your past and not proactively thinking about your future. You’re only seeing a small part of the story.

Any accountant can spin up a cash flow statement, but those who regularly forecast have a stronger pulse on the company and a more intimate understanding of its financial health.

For years, our team has looked at cash flow with our clients once a week on a 6-week forecasting cycle, and then again once a month on a 12-month forecasting cycle.

Why do we do this?

Because businesses are dynamic, not static. By continuously monitoring a company’s cash flow, we can build more accurate forecasts and make smarter strategic recommendations around day-to-day decisions like employee raises, hiring and firing, taxes, and acquisition opportunities.

We like to look at cash flow two ways:

  1. Short-Term Cash Flow — a 6-week rolling cash flow forecast; the goal here is to make sure you’re not running out of cash. At a minimum, you should be looking at this each week, but we often look at this forecast several times a week if not every day depending on the business.
  2. Long-Term Cash Flow — a 12-month rolling cash flow forecast; the goal here is to think more strategically. At a minimum, you should adjust this forecast each month. You won’t get much insight looking at this forecast just once a year.

Knowing what numbers to hit is critical, and then knowing how often to track those numbers will help you take stronger control of your business’ financial health.

At this point, let’s think about how to manage it all.

How can I manage my cash flow?

Most companies manage cash flow by looking at one master bank account. With just one account, it can be hard to stow money away for taxes or for other projected expenses. It can also be hard to understand the health of your cash flow on a regular basis.

Manage your cash flow with a few different accounts.

What we’ve found to work well is to have three separate accounts, each with a different purpose:

1. Operating Cash Account

This is your primary checking account, and what you’re likely already using your existing bank account for, like everyday expenses, payroll, or incoming revenue.

2. Cash Reserve Account

This account is your emergency fund account. You know, if receivables aren’t being collected on time, or if you’d like to take advantage of a business opportunity, but you wish to use your own cash rather than going to a bank.

Your cash reserve account helps you weather financial storms. If you don’t have this account, a minor issue can quickly turn into a major one. Between the Cash Reserve and Operating Cash Accounts you should have a goal of maintaining at least 10% of your annual sales, with an ultimate goal of maintaining 30% of your annual sales between these two accounts. This should equate to having about 2 to 6 months of operating expenses in your bank account at all times. The percentages are not an exact science, but they are close enough and very easy to remember. So, if your business does $3 million dollars of annual revenue, then you will want to keep $300K to $900K in the bank at all times.

Run a service-based business and want to learn more about how to build a strong cash reserve?

Check out my other Medium article, How $10 Can Net You An Extra $300,000.

3. Tax Reserve Account

In this account, you’d stow away money for your state and federal taxes. Typically, you would transfer money into this account once a week. Many other companies do this quarterly, but we’ve found that it’s better to automate and adjust on a weekly basis.

If you want to get a sense of how much money you should be putting into your tax reserve each week, take 40% of your projected net income for this tax year, and then divide that by fifty-two. As an example, if you’re expecting $1 million in net income this year, then you should set aside $7,692 per week ($1 Million x 40% Estimated Taxes/52 weeks) to the Tax Reserve Account. Each quarter, when estimated payments are due, you will pay the estimated tax payments out of the tax reserve account.

Wait, don’t stop reading now. Only make the minimum estimated payments required by law — this should have been calculated by your tax advisor when they prepared your prior year return. Let the calculated balance ride in the Tax Reserve account and accumulate throughout the year. Then when April 15th rolls around pay the unpaid balance out of the your Tax Reserve Account.

The result will be a tax season without the big SURPRISE on April 15th.

Request a custom, financial scorecard

Still reading? Cool!

Hope this article helped unravel the importance and process of better managing your company’s cash flow.

If you run a business and want to learn more about how you can improve its financial health, here’s a link to a no-obligation offer my team is running to help showcase what we do. You’ll get a free, custom financial scorecard for your business and a follow-up from one of our Virtual CFOs.

Questions? Feedback? Visit our website at summitcpa.net/virtual-cfo-services or Email me at jody@summitcpa.net.


Jody Grunden is a nice guy who likes hockey, golf, and his family. He also meets with businesses on a weekly basis as a Founder and Managing Partner over at Summit CPA Group, a Virtual CFO firm that helps growing companies manage (and improve) their finances.

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