Mastering Cash Flow: The Key to Business Stability and Growth

What is cash flow?

Cash flow is the movement of money in and out of a business, essentially cash received (from sales, investments or financing) versus cash paid out (for expenses, debt repayments and other obligations).

The three main classes of cash flow are:

• Operating - The net cash generated by core business activities (sales less operating costs)

• Investing - Money spent/earned from buying/selling assets, acquisitions and investments

• Financing - Cash received from/paid for borrowing and investor funding

Free cash flow, a key metric, measures the operating cash left over after capital expenditures, such as purchasing equipment or infrastructure. Positive free cash flow enables reinvestment and business growth, while sustained negative free cash flow can quickly lead to liquidity crises and business failure if not backed by sufficient funding.

How does liquidity differ from cash flow?

While cash flow measures movement, liquidity is about availability. Is there enough readily accessible cash or liquid assets to meet short-term obligations? A business with positive cash flow can still struggle with liquidity if cash is tied up in long-term investments or illiquid assets. High liquidity provides financial flexibility, allowing businesses to cover expenses, handle financial shocks and seize new opportunities without relying on emergency borrowing. Low liquidity, on the other hand, can create cash shortages, forcing a business into distress.

Why Can Profitable Businesses Fail?

Many businesses assume that if they are profitable, they are safe but profitability is not equivalent to cash availability. Profit is based on accrual accounting, with revenue recorded when earned and expenses when incurred, regardless of when the cash is actually received or paid.

For example:

• A company has $10,000 in the bank

• It makes $100,000 in sales and collects $30,000 in cash, with the rest due in 60 days

• It must pay this month $50,000 for rent and payroll and to suppliers for the sales

• Even though it is profitable ($100,000 - $50,000 = $50,000), it will run out of cash ($10,000 + $30,000 - $50,000 = -$10,000) and fail before collecting the receivables

Without careful planning, profitable businesses can run out of money while waiting for revenue to materialize.

Basic monitoring

Tracking cash flow starts with regularly reviewing bank balances and comparing them against actual and projected inflows and outflows with a cushion for unexpected events. Monitoring should be frequent, at least weekly and daily in times of liquidity pressure. Online banking tools provide real-time access to cash data.

Key Ratio Metrics

Liquidity (short-term needs) and solvency (long-term sustainability) can be assessed with financial ratios. These ratios are simple to calculate and provide a snapshot of financial health that can be benchmarked against competitors, industry averages and past performance but they must be measured frequently to identify trends.

Liquidity Ratios

• Current Ratio = Current Assets/Current Liabilities. Can current assets (cash, stock, debtors) cover current liabilities (supplier balances, payroll, rent)?

• Quick Ratio or Acid Test = (Current Assets – Stock)/Current Liabilities. Since stock may take time to convert into cash, this ratio excludes it to provide a more conservative liquidity assessment.

Solvency Ratios

• Debt To Assets Ratio = Debt/Assets. Measures financial leverage, the use of borrowed funds to finance operations or investments and increase potential returns. A high ratio may indicate increased financial risk, depending on the structure and maturity of the debt.

• Interest Cover = Profit Before Interest and Tax/Interest Payable. Assesses the business’s ability to service debt obligations using operational profits.

What are Burn Rate and Runway?

Two related metrics, burn rate and runway, are critical for businesses with extended periods of negative cash flow, whether due to turnaround efforts, rapid growth, long R&D cycles or heavy capital investment. NGOs and startups rely on these metrics to assess financial sustainability. NGOs, often without steady income, depend on grant funding to achieve their goals, whereas startups use cash reserves while developing products, finding product-market fit and scaling operations.

• Burn rate measures how quickly cash is being spent. Gross burn rate is total cash outflows per month while net burn rate is cash spent per month after accounting for revenue. Burn rate must be calculated dynamically, accounting for fluctuations and anticipated changes in the business. As it rarely stays constant from month to month, understanding cost and revenue structures is essential, especially what is fixed vs variable and recurring vs one-off. Three/six month rolling averages can smooth out irregular costs and one-off items must be adjusted for. A more realistic burn rate leads to better decisions.

• Runway is available cash divided by average net burn rate, representing the time available to reach breakeven or secure additional funding. Business maturity and funding strategy determine the ideal runway length. When assessed correctly, runway informs decisions on hiring, investment, cost control and fundraising. In calculating runway, average net burn rate is adjusted for anticipated cost increases (e.g. new hires) and realistic potential cost savings. Revenue growth may be included, but only if the income is committed or highly probable with confidence in both timing and collection. Stress-testing various scenarios (e.g. delayed fundraising, unexpected costs) gives a more realistic view of available runway.

Startups and NGOs face very different challenges that determine the ideal runway for financial resilience.

• Startups

  • Early-Stage (Pre-Revenue/Seed): 12-24 months. High uncertainty, limited revenue, long fundraising cycles. Require time to build, test and attract investment

  • Growth-Stage (Series A+): 12-18 months. Focus on scaling and unit economics. Runway must balance expansion with efficiency and align with upcoming funding rounds

  • Late-Stage/Pre-Profitability: 9-12 months. Strong financial discipline. Mature revenue models. Prepare for expansion or acquisition while staying resilient 

  • Mature: 6-12 months. Profitable or near-breakeven. Focus on working capital, reserves and managing volatility

• NGOs

  • New/Early-Stage: 12-24 months. Face long grant cycles. Must show sustainability to secure funding. Longer runway allows continuity and relationship building

  • Established: 9-18 months. More stability from recurring donations and grants. Planning needed to bridge gaps between renewals and unexpected shifts in funding

  • Large/International: 6-12 months. Often multiple complex grants. Robust contingency planning due to high fixed costs and external uncertainties

There are a number of key strategies to adopt when considering burn rate and runway.

• Raise funds before runway gets critical

• Align runway with fundraising cycles

• Adjust burn rate dynamically

• Test various scenarios

• Diversify income sources and build reserves

• Define runway triggers to avoid last minute panic

Cash Management in Practice 

There are a number of practical ways to improve cash management, strengthen financial resilience and reduce the risk of shortfalls during uncertainty or uneven funding.

• Forecasting. Accurate forecasting is essential for visibility and planning. Build rolling forecasts with best- and worst-case scenarios and compare regularly to actuals. Use software or spreadsheets to test what-ifs, track deviations and improve accuracy over time.

• Accounts Receivable. Unpaid invoices hurt liquidity. Invoice promptly, follow up on overdue payments and consider incentives for early settlement. Review credit terms for clients who pay late. Consider deposits for major projects.

• Accounts Payable. Extend payment terms where possible. Match outflows to expected inflows to smooth cash cycles. Transparent communication and a reliable payment history can help secure better terms.

• Expenses. Review costs regularly. Trim discretionary spending, renegotiate contracts and seek cost-effective alternatives. Periodically review fixed commitments, like software licences, for continuing relevance. Collaborate with other organizations to share resources such as office space, staff, logistics or back-office functions.

• Rent vs Buy. Rent instead of buy to preserve cash and flexibility, especially for short-term or uncertain needs. Renting avoids large upfront costs and reduces financial strain.

• Inventory. Excess stock ties up cash. Monitor turnover, align inventory levels with actual demand, use just-in-time principles where feasible and reduce obsolete and slow-moving stock.

• Short-Term Financing. To mitigate potential shortfalls, maintain access to short-term financing options such as overdrafts or working capital loans. These allow continuity if grants or funding are delayed.

• Automated Alerts. Set up alerts for low balances, overdue receivables or expense thresholds. Early warnings support faster action.

 Strong cash management delivers far-reaching benefits.

• Financial stability and flexibility. Protects from shortfalls and surprises

• Better decision-making. Backed by real-time data and clear forecasts

• Reduced borrowing costs. Fewer urgent loans, better rates and stronger negotiation positions

• Improved profitability and growth potential. Funds directed to the right opportunities

• Stronger external relationships. Builds trust with suppliers, funders and partners