Cash Flow

Cash in minus cash out

Over a month, a quarter or a year, add up every dollar that actually landed in your bank account and subtract every dollar that left it. What remains is your cash flow for the period. Positive, your cash pile grew; negative, you funded the gap from savings or a line of credit.

Because it only counts money that moved, cash flow is brutally honest. Invoices sent but not yet collected do not count, and neither do bills you owe but have not paid. Your bank balance is the scoreboard.

Why cash flow is not profit

Profit is an accounting result. It records revenue when you earn it, not when you get paid, and spreads some costs over time rather than when the money leaves. Cash flow records only the movement of money, so the two can tell very different stories in the same month.

Send a client a $10,000 invoice in March and your books show March revenue. If the client pays in June, your cash flow sees nothing until June, even though you paid for materials, subcontractors and rent up front, in real cash. This is how a profitable business can die waiting to be paid: the income statement looks healthy while the bank account runs dry.

The three buckets, in plain words

Accountants sort cash flow into three buckets. Operating cash flow is the day-to-day engine: money from customers, minus payroll, rent, suppliers and the rest of running the business. Investing covers buying or selling long-lived things like equipment or vehicles. Financing covers money moving between the business and its backers: loans taken or repaid, owner money in or out. In a healthy business, the operating bucket does most of the heavy lifting; if loans are covering payroll month after month, that is a warning sign.

The remittance rhythm that surprises new owners

The GST/HST you collect on sales sits in your account looking like your money, then leaves in a lump when the filing deadline arrives. The same goes for payroll source deductions if you have employees. Neither amount was ever really yours, but if you have been spending against the full bank balance, remittance day feels like a crisis. Many owners move collected tax into a separate account the day it comes in.

The self-employed face a second trap: no one withholds income tax from your revenue. The first spring after a good year can bring a large personal tax bill plus CPP contributions, and after that the CRA generally expects quarterly instalments. Setting aside a fixed share of every deposit, often 25 % to 30 %, turns the shock into a routine.

Managing cash flow

Speed up money coming in, smooth money going out, and keep a cushion for the gap. Invoice the day the work is done, not at month end. Chase accounts receivable early and consistently: a polite reminder at day 30 collects far better than an angry one at day 90. Ask for deposits on big jobs.

On the cushion side, keep a cash buffer, the business version of an emergency fund: a few months of fixed expenses in a separate account. Knowing your working capital tells you how big the gap between paying and getting paid really is.

Cash flow at home

The same idea applies to your household: income in, expenses out, and the difference is what you can save, invest or put against debt. A budget is simply a plan for your personal cash flow.