This number doesn't tell you whether you're making a profit. It tells you whether you'll be able to pay your bills. To know whether your business is profitable, you need other measures, covered in our guide to profitability indicators. The two views complement each other: a profitable business can run short of money in a given month.
Money in the bank or profit: why aren't they the same thing?
Your cash is the money your business has available right now: cash on hand and the balance of its bank accounts. Your profit (or net income) is what's left of your sales once your expenses are deducted, as calculated in your accounting books.
The two don't move at the same time. In accounting, a sale counts as soon as it's invoiced, and an expense as soon as it's incurred. Your bank account, on the other hand, only changes when money actually comes in or goes out.
What happens | Effect on your profit | Effect on your bank account |
|---|---|---|
You invoice $5,000 to a customer who will pay in 45 days | +$5,000 this month | Nothing until they pay |
You prepay the year's insurance | The expense is spread over the months covered | It all goes out this month |
You buy a $2,000 computer | The cost is spread over several years | $2,000 goes out the day you pay |
You repay $500 of principal on a loan | No effect: repaid principal isn't an expense | $500 goes out |
You charge your customers GST and QST | No effect: these taxes aren't income | They come in, but you'll have to remit them |
Spreading the cost of a long-lasting asset, such as a computer, is called amortization: its price is spread over the years it's in use.
Sales taxes deserve special attention. If you're registered for the goods and services tax (GST) and the Quebec sales tax (QST), the taxes your customers pay you land in your account along with their payment. They don't belong to you. You hold the GST you collect in trust, meaning on behalf of the government, until you remit it. In Quebec, Revenu Québec generally administers the GST. In your tracking, treat the QST you collect the same way: set it aside.
Because of this timing gap, even a profitable business can go through short periods when more money goes out than comes in. The real danger is when this lasts: a business whose cash flow stays negative for a long time generally becomes insolvent, meaning unable to pay its debts.
What are the three types of cash flow?
To understand where money comes from and where it goes, it's sorted into three categories. This is also the structure of the cash flow statement, one of the financial statements prepared at year-end.
Category | In plain terms | Examples |
|---|---|---|
Operating | The money from your day-to-day business | Customer payments, suppliers, salaries, rent, electricity, income tax |
Investing | The money for assets that last | Buying or selling equipment, a vehicle, a building |
Financing | The money from lenders and owners | New loan, loan repayment, shareholders putting money in, dividends paid |
Add the three together: you get the change in your cash for the period, meaning how much money the business gained or lost in the bank.
How to read each category:
- Operating. This is the most important one. Positive month after month, it shows that your business generates cash. Negative several months in a row, it shows that your savings or your borrowing are paying the bills.
- Investing. It's often negative when you're buying equipment. That's not a bad sign in itself. The real question is: how was this purchase paid for?
- Financing. It's positive when you borrow or when a shareholder puts money in. It's negative when you repay a loan or pay a dividend. If financing alone is keeping your balance up, it's time to talk about it.
What to do: your 30-minute monthly routine
This routine doesn't require a formal financial statement. You start from the actual money in and money out, which is called the direct method. It's the simplest one for an owner who does their own tracking.
Before you start: your books for the month are up to date. All transactions are entered and your bank accounts are reconciled, meaning each line on your statements matches an entry in your books. Without this step, you're analyzing incomplete numbers.
- Note your opening balance (2 minutes). This is your bank balance on the first day of the month. If you have a line of credit, also note the amount used.
- Sort the money in and the money out (10 minutes). Put each item in one of the three categories. Set apart the taxes you collected and, if you have employees, the source deductions to remit.
- Calculate your closing balance (3 minutes). Opening balance, plus money in, minus money out. Compare the result with your bank statement. A difference points to a transaction that was missed or misclassified.
- Ask yourself five questions (10 minutes). The table below guides you.
- Look at next month (5 minutes). List the big payments you already know about: payroll, rent, tax remittance, loan payment. Next to them, note the customer payments you're expecting. If the numbers don't add up, act now: follow up with late customers, postpone a purchase or talk to your bank.
Question | Where to look |
|---|---|
Did my business generate cash this month? | The "operating" category |
Are my customers paying more slowly than before? | Unpaid invoices and how old they are |
Have I set aside the money that isn't mine? | GST, QST and source deductions to remit |
Does this month look like the others? | One-off payments: equipment, dividend, early repayment |
Does the money coming in cover my fixed costs? | Customer payments compared with rent, salaries, subscriptions |
Fixed costs are the ones that don't change with your sales, like rent. If the money coming in often struggles to cover them, calculate the minimum revenue that covers your fixed costs. Also compare each month with the previous three and, if your business is seasonal, with the same month last year.
Fictional example: October at a small agency
Fictional example, designed to illustrate the method. The amounts are rounded and don't describe any real business.
A services agency has a team of four. It's registered for the GST and QST. Here is its month of October.
October | Amount |
|---|---|
Bank balance on October 1 | $18,000 |
Payments received from customers (taxes included) | $42,000 |
Salaries and deductions paid | ($19,000) |
Rent | ($2,800) |
Suppliers and subcontractors | ($7,400) |
Software, phone and insurance | ($1,300) |
GST and QST remittance for the previous period | ($3,900) |
Operating | $7,600 |
Purchase of two computers | ($4,200) |
Investing | ($4,200) |
Repayment of loan principal | ($1,500) |
Dividend paid | ($2,000) |
Financing | ($3,500) |
Change for the month | ($100) |
Bank balance on October 31 | $17,900 |
Amounts in parentheses are money going out.
What the owner learns from reading it:
- The month isn't "flat." The balance only drops by $100. Yet the business brought in $7,600. That money went to buy the computers, repay the loan and pay a dividend.
- Not all of the balance is available. Suppose $4,000 of GST and QST collected in October still has to be remitted. The money that's truly available is therefore $13,900.
- October's profit will be different. The computers will be expensed little by little, through amortization. Neither the loan repayment nor the dividend is an expense. So October can show a profit even though the account went down.
What about November? She does a quick first calculation with two scenarios.
November (fictional forecast) | Customers pay on time | A large customer pays late |
|---|---|---|
Opening balance | $17,900 | $17,900 |
Expected customer payments | $42,000 | $24,000 |
Regular expenses (salaries, rent, suppliers, software) | ($30,500) | ($30,500) |
GST and QST remittance | ($4,000) | ($4,000) |
Loan repayment | ($1,500) | ($1,500) |
Projected closing balance | $23,900 | $5,900 |
In the second scenario, the account stays positive. But it only covers a little over a week of salaries. At the slightest surprise, she'll have to draw on the line of credit. So the owner follows up with that customer right away and postpones a planned purchase.
Monthly tracking, cash flow statement, cash flow forecast: which one does what?
Three tools have similar names. They don't answer the same question.
Tool | What it looks at | The question it answers |
|---|---|---|
Monthly cash flow tracking | The month that just ended | Where did my money go? |
Cash flow statement | The whole year, usually | How did my cash change, presented in a standard format? |
Cash flow forecast | The coming weeks and months | Will I have enough money to meet my commitments? |
The cash flow statement is normally prepared once a year, with the other financial statements. Not every accounting engagement includes it: if you want one, ask for it specifically. For a very small business, it may be less necessary, because it's more complex to prepare. Your monthly tracking, on the other hand, remains essential.
The cash flow forecast goes further than the quick November calculation. It projects your money in and money out over several months, based on assumptions about your sales, your payment terms and your expenses. We cover it on our Financial projections page.
Mistakes that distort the picture
- Looking only at the bank balance. A stable balance can hide a business that's losing money, offset by a loan.
- Counting the taxes you collect as available money. The GST and QST you collect are there to pay your tax remittances, not your expenses.
- Mixing personal and business expenses. The three categories become impossible to read.
- Judging a single month on its own. An equipment purchase or a large annual payment skews the picture. Compare over several months.
- Tracking from books that are behind. Missing transactions give a false sense of security.
Frequently asked questions
Is it serious when more money goes out than comes in during a month?
Not necessarily. First, look at which category is negative. If it's investing or financing, you probably bought equipment or repaid a loan: that's a choice, not a warning sign. If it's operating, look for the cause: a late customer, an annual bill paid this month. If operating stays negative several months in a row, your business is costing more money than it brings in.
How often should I look at my cash?
At least once a month, as soon as your books are up to date and your accounts are reconciled. If your balance is tight or your receipts vary a lot from week to week, add a five-minute check every week: bank balance, unpaid invoices, big payments due in the next seven days. Keep the full review for the end of the month.
Why does my bank care about my cash flow?
Because it shows your ability to repay. Banks look at cash flow to decide how much they'll lend. They start from EBITDA, your earnings before interest, taxes, depreciation and amortization, then subtract the principal and interest payments on your debts. Clean monthly tracking lets you go into these discussions with numbers you understand.
I'm self-employed: does this tracking apply to me?
Yes, and the routine is the same. Two precautions matter even more for you. Use a bank account reserved for your business, so you don't mix personal and business expenses. And every month, set aside what you'll have to pay later: the taxes you collect if you're registered, and a reserve for your income taxes. Your real balance is what's left after these reserves.
Keep reading
Monthly tracking is only as reliable as your books. Alta Conseils keeps your books and closes each month, so your review rests on reconciled accounts. To look several months ahead, we also prepare financial projections, including the cash flow forecast. Tell us about your situation.
- The indicators that tell you whether your business is profitable: margins and ratios, to round out your view of your cash.
- Calculating your break-even point, with an example: the sales level that covers your fixed costs.
- Financial projections and cash flow forecast: plan your cash needs for the coming months.
