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8 Keys to Killer Cash Flow Literacy

Every year, far too many good businesses fail due entirely to poor cash management. Companies with great products, brands with loyal followings, businesses that solve essential problems – dead in the water because their cash flow dried up.

The folks who run these companies aren’t dummies. More likely, they weren’t equipped with the knowledge and cash management skills they needed to get the job done. We don't want that for you.

We know not everyone can be “numbers freaks” like us – and hey, no problem. We’re not out to turn our clients into pencil-pushing, Excel spreadsheet fanatics. But we do wholeheartedly believe that without cash flow literacy in your company’s leadership, there’s a good chance your business will either fail or fail to grow in the ways you hope and plan for.

Cash flow literacy involves understanding the key components of cash management, why they are important, and how to optimize your awareness of them in service of your business.

Cash flow literacy for businesses is the equivalent of “financial literacy” for individuals and families. Just as you and I need to understand key financial tenets to operate in the world, as business owners, we also need to be engaged and aware of how our company’s cash flow operates.

This article is intended to introduce the eight key elements of cash flow management and provide the basic background context of each.

While you may be aware of the terms themselves, what you need to understand is how they affect your cash flow – and what to do if you’re not getting the results you want.

Here are the eight elements we’ll be discussing:

  1. Revenue

  2. Sales/marketing Expenses

  3. COGS

  4. Operating Expenses

  5. Additional Outflows

  6. Profit

  7. Accounts Receivable

  8. Accounts Payable

With that, let's dive in!


Revenue is the most basic element of cash flow: it is the money you bring in from products and services sold. Ideally, increasing revenue should increase your cash flow, and in turn, increase your profits and the money available to you – the business owner – for the fruits of your labor.

Unfortunately, this isn’t always the case. Like individuals caught in the “rat race”, many companies find themselves on a constant revenue-chasing hamster wheel, needing to generate more and more revenue to cover greater and greater expenses.

If you are experiencing this in your business, then improving efficiency and decreasing expenses needs to be an immediate part of your business strategy.

Sales/marketing expenses

These are the expenses directly related bringing in sales. Said another way: Your sales and marketing expenses should generate revenue.

Cash flow literacy in this area involves clarity around the cost and returns of the advertising and marketing dollars spent. The money you spend acquiring new customers should be less than those customers are spending at your business. You'll want to monitor your sales and marketing expenses consistently to ensure they are driving growth.


Your COGS, or the Cost of Goods Sold, are the expenses needed to acquire or produce your products. COGS includes the packaging you use to distribute your products and the shipping costs you pay to bring in inventory. If you sell physical products, it is helpful to view your revenue as the amount above your COGS when setting your sale price. For instance, if you want to make $10 on every candle you sell, you would set the price of the candle at $10 plus the cost of COGS.

It goes without saying that your COGS should never be more than the price of the final product. (Unless you’re clearing out stale inventory that is taking up space where more valuable pieces could be stored, but that is a topic for another day).

Pro tip: Your Gross Profit is your revenue minus your COGS. If you notice your revenue going up while your Gross Profit stays the same or goes down, it means your COGS are eating up more of your sales price. In this case, investigate where the costs are increasing and see if you can negotiate with suppliers or shop around for alternative materials. If you cannot find ways to reduce your COGS, it may be time to consider raising your prices.

Operating Expenses

Your operating expenses are all the other costs of running your business, including staff, rent, office supplies, and other overhead expenses. This also includes essential business support services like business consulting and accounting services.

As with COGS, the lower your operating expenses, the better your cash flow. In general, businesses want to minimize the costs of operating the business – for several reasons.

In the immediate term, lower operating expenses equals more cash flow. That cash is what you use to pay yourself – the owner – and also to pay down debt, save for rainy days, and invest in things that grow the business later.

In the longer term, operating on a lean budget makes your company more resilient to market downturns, unexpected dry spells, and other potentially devastating issues your company may face. If your company brings in $100K per month and uses $90K of it for operating expenses, you have very little wiggle room if revenue unexpectedly dries up for a few months.

Additional Outflows

This element of cash flow relates to other outflows not reported on your P&L – namely debt and owner’s distributions. Both outflows will impact your bank balance, and thus both are crucial to understanding your company’s cash position.

It’s important to remember that while credit cards, loans, and other debt payments make a HUGE impact on your cash flow, these are often left out of budget calculations because they aren’t reported on the P&L (see below).

Likewise, while any owner’s salary that runs through payroll is captured on your P&L, your owner draws and distributions are not. Owner Draws are the additional disbursements you take directly from the company above and beyond your payroll salary. If you have a $5,000 per month auto-transfer set to deposit cash from the business to your personal account, you’ll want to make sure that transfer is factored in when evaluating your cash flow.


Your revenue minus your COGS and operating expenses equals your Profit. In most circles, Profit is considered the biggest indicator of cash flow health – and too many business owners stop there.

As noted above, what’s important to remember about Profit is that your debt payments and owner's distributions typically aren’t reflected here. Many “profitable” companies go broke when they can’t pay back loans or investors with the profits they’re generating. Or they fail because the business owner can no longer afford to forgo pay from the company. I once worked with a client who was profiting over $12,000 per month – but they were borrowing money every week for payroll because their minimum monthly debt payments were upwards of $20K.

We assert that Profit is often a poor indicator of cash flow health, and we encourage business owners to take a more holistic view. When looking at Profit as an indicator of cash flow, it is essential that you are aware of and include other financial obligations that aren’t reported on your Profit & Loss statement.

Accounts Receivable

Accounts Receivable is the money owed to your business for products or services that has not yet been collected. There are two important points to be aware of when it comes to your AR:

1) Don’t bank on it until it’s in the bank. Until you have the money in hand, open invoices have ZERO IMPACT on your cash flow. You may have a $15,000 check coming to you, but if it gets lost in the mail, payroll still won’t be covered.

2) Accounts Receivable isn’t a “set it and forget it” phenomenon. As companies grow, it can get harder and harder to stay on top of open invoices. Clients forget, and business owners do too. If you operate with Accounts Receivable, make sure you’ve implemented a streamlined collections process.

Generally, we encourage clients to create systems that minimize Accounts Receivable. If you can, offer only services/goods for upfront payments. If you must use invoices that collect on sales after the fact, consider offering discounts for on-time or early payment, and make sure you have processes in place for staying on top of your AR.

Accounts Payable

On the flipside, Accounts Payable is the amount that your business owes other companies like suppliers and other bills. From a cash flow perspective, it’s best to time these payments such that expenses are spread out, rather than occurring all at the same time. You can negotiate terms with vendors, pay certain bills early, and ask for different debit dates for subscriptions and bills paid by ACH.

Another tool to use to manage your Accounts Payable well is to use savings accounts for periodic expenses, like annual insurance policies and equipment upgrades. If you have a large supplier bill due in 30 days, consider setting aside portions of it each week until the due date.

When it comes to savvy Accounts Payable management, spacing out your expenses and planning ahead for larger investments will help you avoid the “feast and famine” cycles that can take a company under.


Every business depends on cash to survive, and being intelligent with your cash management requires awareness and consistent monitoring. Make an hour each week to touch base on each of the elements outlined above. Doing so will give you the crucial information you need to make wise choices about your business.

If you ever have questions or want to talk more with us about your business’s cash flow, don’t hesitate to reach out. We love geeking out about this stuff, and we’re here to support you!!

Cover Photo by George Milton:



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