Cash Flow: Money In, Money Out
Cash flow is the timing of money moving in and out. You can be 'making money' on paper and still run out of cash.
Example: you mow lawns in June but get paid in July. In June you're busy and broke; in July you're paid. The gap is a cash-flow problem.
Fixes: ask for deposits, get paid faster, keep a small cushion, and don't spend money you haven't received yet.
You, imagine you agree to build a gaming PC for a friend for $800. If the parts cost $700, you need to have that cash or get a deposit from your friend before you can buy the parts and start building.
Learning objective
Build a dated cash plan and distinguish cash, earned revenue, profit and unpaid invoices.
Understand the mechanism
Cash is money available to spend now. Revenue records what the business has earned under its accounting method; profit subtracts the related expenses. Timing differences mean those numbers can disagree. Work completed today can be profitable even when payment arrives next month.
Cash planning asks two questions of every transaction: how much and when? An unpaid customer invoice is not money in your bank. A planned payment is not certain simply because you put it on a calendar. Identify which inflows are confirmed and which depend on an assumption.
Opening cash plus cash received minus cash paid equals closing cash. The next period begins with that closing balance. You cannot repair a negative Tuesday balance with a Friday receipt unless you have a real, agreed way to bridge the gap.
Put it to work
Agree payment terms before doing work. A deposit can fund supplies, but it also creates a duty to deliver or refund according to the agreement. Keep a record of receipts and payments. Never spend all customer deposits on personal wants.
Plan a base case and a late-payment case. Move uncertain receipts later and ask whether you can still meet obligations. If not, reduce spending, renegotiate timing or build a buffer before accepting the job. Collect money respectfully and promptly; sending an invoice late creates a delay you could have prevented.
Worked example
- 1
Start Monday with $40. Pay $25 for supplies: cash falls to $15.
- 2
Finish $60 of work on Tuesday. The customer pays Friday, so Tuesday cash is still $15 even though work has been earned.
- 3
A $20 bill is due Wednesday. Your plan is short $5 before Friday's receipt.
- 4
A $20 deposit received Monday would leave $35 after supplies and $15 after Wednesday's bill. On Friday collect the remaining $40, not another $60.
A profitable job is only survivable if its payment schedule lets you pay your bills.
Your practice lab
You start with $30, pay $20 for supplies Monday, owe $15 Wednesday and expect $50 Friday. Find the lowest cash balance and two ways to avoid a gap without pretending Friday comes early.
Personal scratchpad · not graded or saved
The Spirit Week Shirt Crisis
Two friends, Maya and Leo, designed a custom T-shirt for their school's spirit week. They got 50 pre-orders at $20 each, totaling $1,000 in sales. They were thrilled with their profitable idea, as the blank shirts and printing would only cost $600, leaving them with $400 in profit.
They placed the $600 order with their supplier, who needed to be paid immediately. However, Maya and Leo had planned to collect money from their classmates when they delivered the finished shirts. They only had $100 of their own money available. Despite having a profitable business on paper, they didn't have the cash to pay their supplier and were facing a crisis.
Luckily, they were able to explain the situation to a few customers who agreed to pay early, giving them enough cash to pay the supplier. The crisis was averted, but they learned a valuable lesson.
A profitable business can still fail if it doesn't have the cash to pay its bills on time. Securing deposits or having a cash buffer is crucial for funding upfront costs.
Illustrative example — names and figures are composites for teaching.
What is one upfront cost your venture will have? Write down one strategy to make sure you have the cash to pay for it *before* you get paid by your first customer (e.g., personal savings buffer, asking for a deposit).
Example: My custom sneaker art business needs special paints and brushes that cost $60. I will ask each customer for a 50% deposit when they place their order to cover these supply costs.
Go deeper — outside resources
- MyMoney.gov — learning hub · MyMoney.gov
- Manage your business's financial health · U.S. Small Business Administration
Key ideas
- Timing matters as much as totals
- Profit on paper ≠ cash in hand
- Deposits and cushions protect you
Try it: Map a pretend week: when does money come in and go out for a dog-walking business?
Quick check
1. You did $500 of work but haven't been paid yet. Your cash is…
2. Which helps a cash-flow gap?
3. You start the week with $20. You spend $10 on supplies on Monday and get paid $50 on Friday. What is your cash balance on Wednesday?
4. A client agrees to pay you $100 for a project. Your supplies cost $30. What is your profit?
5. A client pays you a $20 deposit on a $70 job. When they pay the final bill, how much should you invoice them for?
6. Why is it important to create a 'late-payment case' plan?