The Best Way to Monitor Cash Flow: From Bank Balances to Forecasts
Introduction
Cash is the lifeblood of every business. Yet many owners monitor it only by logging into their bank account and checking today’s balance. While that shows how much cash is on hand in the moment, it doesn’t reveal how healthy—or vulnerable—the business truly is.
The best way to monitor cash flow combines both historical financial reporting and forward-looking forecasting. This paper outlines a structured approach business owners can use to stay on top of liquidity, avoid surprises, and make smarter financial decisions.
1. Use the Statement of Cash Flows as the Foundation
The Statement of Cash Flows (CFS) is the most reliable financial report for tracking actual cash movement.
• Breaks cash into Operating, Investing, and Financing activities.
• Shows whether day-to-day operations are generating or consuming cash.
• Should be reviewed monthly, alongside the P&L and Balance Sheet.
2. Track Key Cash Flow Drivers
Beyond the reports, owners should monitor the underlying levers that drive cash:
• Days Sales Outstanding (DSO): How long customers take to pay.
• Days Payables Outstanding (DPO): How long you take to pay suppliers.
• Days Inventory Outstanding (DIO): How long capital is tied up in inventory.
• Cash Conversion Cycle (CCC): How quickly profit turns into usable cash.
These metrics explain why cash is rising or falling, not just how much.
3. Build a Rolling Cash Flow Forecast
Looking backwards isn’t enough. A rolling cash forecast shows what lies ahead.
• 13-week forecast: Provides near-term visibility for payroll, rent, and debt service.
• 12-month forecast: Supports strategic planning and growth decisions.
• Update forecasts weekly or monthly by comparing actuals vs. projections.
This forward view helps anticipate crunches before they happen.
4. Monitor Both Cash Flow and Bank Balance
• Bank Balance = daily liquidity snapshot – useful for paying bills today.
• Cash Flow Forecast = roadmap – shows whether that balance will hold up tomorrow.
Both are necessary. Relying on one without the other risks blind spots.
5. Use Dashboards & Alerts
Technology can make monitoring easier and more consistent.
• Dashboards in QuickBooks, Dext, or Bill.com provide real-time visibility.
• Automated alerts can flag when receivables are overdue or balances dip below a threshold.
• Color-coded views (green/yellow/red) help management teams spot risks early.
6. Tie Cash Flow to Decision-Making
Monitoring is only valuable if it drives action.
• Rising DSO? → Tighten credit policies and collections.
• Stretching CCC? → Rebalance inventory or negotiate supplier terms.
• Forecasted shortfall? → Arrange a credit line before it’s urgent.
Best Practice Summary
• Daily: Check bank balance.
• Weekly: Update rolling 13-week forecast.
• Monthly: Review CFS + cash flow drivers.
• Quarterly: Align cash flow trends with long-term financing and growth strategy.
Conclusion
Cash flow health isn’t measured by today’s bank balance alone. The most effective monitoring combines the Statement of Cash Flows, key operating metrics, and forward-looking forecasts. Business owners who implement this layered approach gain clarity, avoid surprises, and position themselves for sustainable growth.
Questions often lead to valuable insights. If you’d like to dive deeper into this topic or explore strategies for your business, please contact us. We can support you with monthly cash flow statements and forecast models aligned to your growth plans. Our monthly executive report, which is provided by our bookkeeping service, will include this data, including the cash conversion cycle (CCC). You can reach us by clicking: Contact Us
zsultan@blackdogadvisor.com