Many business owners underestimate how quickly things can spiral. A few late payments from customers, or unexpected expenses, and you might find yourself struggling to pay vendors, employees, or taxes. That’s why it’s important to understand what affects cash flow, and address those factors before they become a problem.
Cash flow is one of the most important indicators of a business’s financial health. It shows how much cash is coming in and going out over a period of time. Even if your company is profitable on paper, poor cash flow management can lead to serious financial trouble.
Some people assume cash flow is only about making more sales. But the reality is more complex. Everything from your billing cycle to how you manage inventory can affect how much cash you actually have available.
In this guide, we’ll walk through the most common factors that influence your cash position.
Related: Traditional Business Loans vs. Alternative Business Loans: What You Need to Know
What Is a Cash Flow Statement?
Cash flow is the movement of money in and out of a business. It reflects the actual cash your company receives and spends over a specific period. A clear understanding of cash flow gives you a more accurate view of your business’s financial health than profit alone.
There are three main components found in a standard cash flow statement:
- Operating cash flow: Cash generated from day-to-day operations, including sales and payments to suppliers.
- Investing cash flow: Funds used to buy or sell long-term assets like equipment or property.
- Financing cash flow: Cash related to borrowing, repaying loans, or issuing equity.
One important goal is to maintain positive cash flow—where the money coming in is more than what’s going out. This allows a business to pay its bills, invest in growth, and build a financial cushion.
Keep in mind, even a profitable business can face problems if accounts receivable take too long to come in or accounts payable are poorly managed. This mismatch in timing affects the company’s cash flow and can lead to shortfalls, even when revenue looks strong on paper.
Understanding how cash flow affects your business means tracking it carefully and anticipating challenges. Reviewing your cash flow statement regularly helps you identify patterns and stay ahead of problems before they impact operations.
Accounts Receivable vs Accounts Payable: What’s the Difference?
After reviewing your cash flow statement, one of the most important areas to focus on is the movement between accounts receivable and accounts payable. These two categories are often the biggest drivers behind changes in cash position. Understanding how they differ—and how they work together—is key to maintaining control over your finances.
Cash flow refers to the actual movement of money in and out of your business, not just the amounts billed or owed. So, while your income statement may look strong, delays in payment collection can still result in negative cash flow. This usually happens when your accounts receivable balance grows too large. In other words, your customers owe you money, but they haven’t paid yet.
Accounts receivable represents sales you’ve already made but haven’t been paid for. The longer customers take to pay, the more pressure it puts on your working capital. A high receivable balance often looks good in theory, but if those payments aren’t collected promptly, your available cash shrinks—making it difficult to cover daily expenses.
On the other side, accounts payable refers to what your business owes to vendors, suppliers, or service providers. Managing this carefully can help preserve free cash flow, especially during periods of slower revenue. If you pay too early, you might deplete your available cash before incoming payments arrive. Paying too late, on the other hand, could damage relationships or result in fees.
Businesses should strike a balance between extending payables and tightening receivables. Monitoring how long it takes to collect payments and comparing that to your average daily sales correctly can help you understand the timing gap. When the delay between cash in and cash out becomes too wide, that’s when negative cash flow becomes a real risk.
Why Cash Flow Isn’t the Same as Profit
It’s easy to assume that a profitable business is a financially healthy one. But profit and cash flow tell very different stories. Profit reflects earnings after expenses, while cash flow shows the actual movement of money in and out of your accounts. The difference matters more than most business owners realize.
A company can show strong earnings yet still struggle to pay its bills. This usually happens when revenue is recorded, but cash hasn’t been collected. If a large portion of your sales sits in accounts receivable, it can leave you cash-poor—even when your books show a profit.
That’s where cash flow analysis becomes important. This process helps you track how money moves through your business. It also reveals how timing, credit terms, and operational costs affect your net cash flow—the final result after all inflows and outflows are added up.
A profit and loss statement may look good, but your company’s ability to stay operational depends on managing cash flow. This means having enough on hand to pay suppliers, staff, and bills when they’re due.
Maintaining positive cash flow means your business brings in more cash than it spends. This is critical for building a reserve, avoiding debt, and planning for future expenses. Without healthy cash flow, even a profitable business can face delayed growth or fall behind on obligations.
If you’re looking to improve cash flow, don’t rely solely on profit margins. Monitor payment cycles, control spending, and regularly review your cash position. These small steps can make a major difference in keeping your operations stable.
Factors Affecting Your Company’s Cash Flow
Understanding what affects cash flow is key to staying ahead of financial challenges. While revenue is often the first thing people look at, there are many moving parts that influence your company’s cash flow—some more subtle than others.
1. Receivables Management
Accounts receivable is the balance of money owed to a company after rendering products and services. Until the client or customer pays their balances in full, the accounts receivables are called outstanding receivables.
The cash flow problems small business owners experience is not because they don’t have enough funds in the pipeline – but because they don’t have enough cash on hand to address current expenses. In fact, studies show that small business owners in the United States have, on average, access to $20,000 in outstanding receivables. This makes it extremely important that you manage your receivables well in order to avoid cash flow issues.
2. Investing and Financing
Investing and financing decisions play a significant role in shaping your cash flow. These aren’t day-to-day operational choices, but they can still have long-term effects on your company’s financial health.
When your business purchases large assets—such as real estate, new equipment, or machinery—these decisions fall under investing activities. While these investments may help the company grow in the long run, they often involve large cash outlays upfront. As a result, they reduce your cash inflows and can create pressure if not timed correctly.
On the cash flow statement, investing activities are listed separately from operating activities. This separation makes it easier to see how much cash is being used to acquire or sell assets. Unlike the income statement, which focuses on profits, the cash flow statement reveals the actual impact of those investments on your available cash.
Financing activities also affect how money flows in and out of your business. These include borrowing funds through loans or issuing equity, as well as repaying debts. For example, if your business takes out a loan to fund equipment purchases, you might see a short-term increase in cash inflows. However, over time, repayments—both principal and interest—become regular outflows that must be managed.
It’s also worth considering how credit sales factor into these decisions. If your business takes on a loan to support increased sales capacity but relies heavily on delayed payments from customers, the mismatch between incoming and outgoing cash can create strain.
Both investing and financing decisions should be made with a clear view of current and projected cash flow. They should align with your company’s broader financial strategy and your ability to maintain liquidity while working toward growth.
3. Employee Management
Managing your team is a key part of running a business, but it’s also one of the most sensitive areas when it comes to cash flow. Payroll is often one of the largest operating expenses a business faces. When there’s a delay in cash flow accounts, even profitable companies can run into trouble.
It’s not uncommon for small businesses to experience cash shortages, especially during slow periods or unexpected dips in average sales. Unfortunately, employees are often the first to feel the impact. When salaries are delayed, it doesn’t just affect morale but also affects people’s lives. Many employees rely on timely paychecks to cover essentials, and late payments can create real hardship.
Recent data shows that 43% of small businesses experiencing cash flow issues struggle to pay their staff on time. Even more concerning, 32% of business owners have had to delay employee payments past their scheduled payday. These disruptions can drive employees to seek other jobs, making it harder for your business to retain skilled workers.
This is why financial planning needs to go beyond just tracking net income. Business owners must maintain enough working capital to ensure they can meet payroll consistently. A positive balance sheet doesn’t help if the actual cash isn’t available when needed.
When looking at what affects cash flow, payroll timing, hiring practices, and staff-related overhead should all be considered. Staffing decisions—whether it’s onboarding new employees or increasing wages—should be weighed against projected cash flow and realistic income patterns.
Regularly reviewing your cash flow accounts and forecasting your payroll expenses can help prevent last-minute surprises. It also ensures your team stays supported, which is critical to long-term business stability.
4. Market Environment
The broader market environment can have a direct impact on a small business’s ability to maintain healthy cash flow. While it might seem like economic shifts mostly affect large corporations, small businesses are often the most vulnerable to changes in interest rates, credit availability, and consumer demand.
During uncertain market conditions, lenders tend to tighten requirements, making it harder for small businesses to access funding. This can slow down cash inflows, especially if a business was counting on outside financing to cover financial obligations or growth efforts. When financing options dry up, companies may be forced to dip into reserves or delay investments, both of which affect net cash flow.
Fluctuations in consumer spending also matter. A drop in average daily sales—even for just a few weeks—can limit how much cash a business brings in. This leads to a ripple effect across the organization, from postponed purchases to delayed payroll.
In these situations, managing small business cash flow becomes more complex. Business owners need to re-evaluate their budgets and take a closer look at other cash outflows, such as subscriptions, vendor payments, and discretionary spending. Cutting unnecessary expenses can help free up working capital and improve liquidity.
It’s also important to align decisions with solid financial reporting. Market shifts can cloud judgment, but reviewing real data helps you stay grounded. Accurate reporting can guide you in identifying cash flow risks early and adjusting strategies accordingly.
In a volatile market, being conservative with investment decisions is often the safer path. Businesses should only pursue new opportunities if they can reasonably project a return within a set timeframe. Otherwise, tying up funds in uncertain investments can strain resources.
5. Payment Management
Another factor that affects cash flow is how small business owners manage payments. Approximately 53% of businesses send out invoices to be paid on a specific date, usually after the services are rendered. On the other hand, 47% require advance payment. Depending on the arrangement, business owners can receive payment from customers before, during, or after rendering the products or services.
But for small businesses, payment processing takes time. In fact, 31% of small businesses said that they wait more than a month to process payments. Furthermore, 66% of small business owners say that payment processing is one of the culprits when it comes to cash flow problems.
6. Working Capital Acquisition
Working capital is essential for small businesses. Without enough cash on hand, you won’t be able to fund daily business operations. If small business owners have limited working capital, they often apply for fast business loans to gain financial support.
Related: 4 Common Cash Flow Problems Solved by Invoice Factoring
However, around 39% of small business owners refuse to apply for business loans because of three main reasons:
- High interest rates;
- They don’t want to make monthly payments; and
- They believe they won’t qualify.
It’s a known fact that it’s hard for small businesses to qualify for bank loans. But fortunately, online lenders or alternative lenders have made it easier for small businesses to qualify for a bank-rate loan.
Make Informed Financial Decisions Through Better Cash Flow Management
Cash flow can definitely make or break your business. The lack thereof can result in debt and even bankruptcy if not addressed immediately. If your business is having cash flow problems, and you need access to working capital ASAP, fast business loans can save the day. By managing the financing your receive, you’ll be sure never to run into complicated cash flow issues in the future.
At SMB Compass, we help businesses improve their financial systems and manage cash flow more effectively. Learn more about our loan services to build a stronger cash flow strategy for your business.
