What is cash flow?

Cash flow is the movement of money into and out of your business over a specific period. For professional service firms, positive cash flow means more money coming in (client payments, loan proceeds) than going out (payroll, vendors, taxes, rent). Negative cash flow means burning more cash than generating. Cash flow differs from profit: a firm can be profitable on paper while running out of money if clients pay slowly (high AR) or if investing heavily in growth (new hires, marketing spend). Managing cash flow means ensuring enough cash on hand to meet obligations while optimizing the timing of inflows and outflows.

Key characteristics of cash flow

• Three types: Operating (client payments, expenses), Investing (equipment, acquisitions), Financing (loans, owner contributions)

• Measured weekly, monthly, or quarterly, depending on business volatility

• Key metric: cash runway (months of cash remaining at current burn rate)

• Affected by payment terms: Net 30 clients pay faster than Net 60

• Seasonal: consulting firms often see Q4 slowdowns, Q1 surges.

Why cash flow matters for service firms

Cash flow problems kill profitable businesses. A consulting firm with $2M revenue and $300,000 profit can fail if $500,000 sits in AR while $400,000 in payroll and expenses come due. Understanding cash flow timing prevents emergency scrambles for credit lines or personal loans. A firm growing from $2M to $4M revenue needs $150,000-$300,000 in additional working capital to fund the AR growth, even if highly profitable. Forecasting cash flow 90 days ahead enables confident hiring decisions instead of reactive layoffs.

Example: Monthly cash flow for a growing consulting firm

• Beginning cash: $180,000

• Cash inflows:

• Client payments collected: $320,000

• Line of credit draw: $50,000

• Total inflows: $370,000
  
  Cash outflows:

• Payroll (2 cycles): $185,000

• Contractor payments: $42,000

• Vendor bills: $38,000

• Rent & utilities: $12,000

• Marketing spend: $18,000

• Loan payment: $8,000

• Owner draw: $15,000

• Total outflows: $318,000

• Ending cash: $232,000 (+$52,000 vs beginning)

• Cash runway: 8.8 months at current burn rate
  
  Note: Generated $48,000 profit this month, but cash only grew $52,000 due to AR collections timing