How bookkeeping supports cash-flow planning

Profit and cash run on different clocks

Profit measures whether the business earned more than it spent over a period. Cash measures what's in the bank right now. The two drift apart because money rarely moves at the same moment the work is done.

A customer might pay 45 days after you invoice. Payroll might go out every two weeks while customer payments arrive in lumps. Inventory might be paid for months before it sells. A loan payment drains cash but only the interest part shows up as an expense. Each of these is normal, and each means the P&L alone can mislead you about how much money you actually have to work with.

Accrual and cash timing, with an example

Books can be kept on a cash basis, which records income when money arrives and expenses when money leaves, or on an accrual basis, which records income when it's earned and expenses when they're incurred. Which basis your business uses, and which it must use for tax purposes, is a question for your CPA or enrolled agent.

For planning, the difference is easy to see. Suppose you finish a $20,000 project in March and invoice it, but the customer pays in May. On an accrual basis, March shows $20,000 of revenue. On a cash basis, nothing appears until May. Neither is wrong; they answer different questions. Accrual tells you how March went. Cash tells you when you can spend the money.

A good cash plan uses both. It starts from accrual records, which tell you what has been earned and what is owed, and then asks when each of those amounts will actually turn into cash.

Receivables and payables are your timing levers

Accounts receivable is money customers owe you. Accounts payable is money you owe suppliers. Between them, they explain most of the gap between profit and cash in a typical small business.

If receivables grow faster than sales, customers are paying more slowly and cash is being tied up. If payables are paid the day bills arrive, cash leaves earlier than it needs to. Small changes add up. Collecting a $15,000 receivable two weeks sooner, or scheduling a $10,000 supplier payment on its actual due date rather than on receipt, can be the difference between a comfortable month and a tight one.

None of this works without accurate aging reports. If invoices are missing from the books, or payments have been applied to the wrong customer, the receivables list will be wrong, and so will any plan built on it.

The same goes for payables. If bills arrive by email and sit unrecorded until someone pays them, the books won't show what you owe, and the forecast will miss cash that is already committed. Entering bills when they arrive, with their due dates, turns the payables list into a schedule you can plan around.

Building a simple 13-week cash view

Thirteen weeks is roughly one quarter. It is short enough to estimate with reasonable confidence and long enough to see trouble coming. A basic version can live in a spreadsheet.

Work in weeks rather than months, because cash problems are usually about timing within a month. A month can end with a healthy balance and still include a week where payroll and rent land before the largest customer pays. A monthly forecast would never show that dip; a weekly one will. Keep the categories simple at first. Five or six lines for cash in and ten or so for cash out is plenty for most small businesses.

• Start with this week’s actual, reconciled bank balance.
• List expected cash in by week: open invoices by likely payment date, plus expected new sales collected within the window.
• List expected cash out by week: payroll, rent, loan payments, card payments, scheduled supplier bills and known one-off costs.
• Calculate each week’s closing balance and carry it forward as the next week’s opening balance.
• Mark a minimum balance you are not comfortable going below, and highlight any week that dips under it.

Keeping the forecast honest

A forecast is only useful if you update it. Each week, replace the oldest forecast week with actual results, add a new week at the end, and look at where your estimates were off. If customers consistently pay ten days later than you assumed, adjust the assumption rather than hoping next month is different.

For example, if your view shows the balance falling to $8,000 in week seven against a $15,000 minimum, you have six weeks to act: chase two overdue invoices, move a non-urgent purchase, or talk to your bank about a line of credit before you need it rather than after.

Monthly bookkeeping gives the forecast a reliable starting point and a way to check it against reality. Sumday’s FP&A service builds and maintains forecasts like this for businesses that want help with the modelling as well as the books.