Your best month ever. And you can't pay the rent.
The story so far Your tune-up stand is working: 25 tune-ups a month at $40. Then a local bike club orders 100 tune-ups for its members in June: $4,000 of work. You say yes. You buy $1,000 of parts up front, do the work, and send the bill. The club pays in 60 days, in August. On paper, June is your best month: $3,450 of profit. But you started June with $500 in the bank, and by June 30 you're at −$50. The market wants its rent. This lesson is about the gap between making money and having money.
Cash flow is the actual money moving in and out of your bank account, and when it moves.
Profitable businesses go under because the bills came due before the customers paid. Running out of cash ends a business faster than a loss.
Map every dollar in and out by month, find your lowest point, and fix the timing before you get there.
Bookkeepers and controllers track cash every week. Small-business bankers lend to cover the gaps. At big companies, a treasurer makes sure there's always cash to pay the bills.
What you're looking at: June from two angles. The profit card counts the club's $4,000 as earned in June, when you did the work. The bank card only counts money that actually arrived. The $4,000 won't show up until August, so the bank account dips below zero.
Profit vs. cash.
Profit tells you if the business works. Cash tells you if it survives the month. You need both, and they almost never match.
Cash flow
Cash flow is the money that actually comes in, minus the money that actually goes out, in a given month. Profit counts a sale when you make it. Cash counts it when you get paid.
- June cash
- Start $500 + $1,000 from regular customers − $1,550 out ($250 regular parts + $1,000 club parts + $300 fixed) = −$50.
- June profit
- 125 tune-ups × $30 − $300 = $3,450, because the club's $4,000 counts as earned.
Money owed to you, and by you
Accounts receivable is money customers owe you. Accounts payable is money you owe suppliers. Receivables are profit you can't spend yet. Payables are costs you haven't paid yet.
- Receivable
- The club owes you $4,000 from June 30 until August.
- Payable
- None: you paid the $1,000 for parts the day you bought them.
Payment terms
Payment terms say when a bill is due. "Net 30" means pay within 30 days. Businesses often pay each other on net 30 or net 60, so the timing gap is normal, and you have to plan for it.
- The club's terms
- Net 60: the June 30 bill is due by about August 29.
A cash forecast
A cash forecast lists the cash you expect in and out, month by month. The most important number is the lowest one.
- June
- $500 + $1,000 − $1,550 = −$50, the low point.
- July
- Regular month: +$1,000 − $550 = +$450, so −$50 + $450 = $400.
- August
- $400 + $450 + the club's $4,000 = $4,850.
Burn rate and runway
New businesses often lose cash every month for a while. The burn rate is how much cash you lose each month. The runway is how many months you can last.
- A slow winter
- If you had $1,200 saved and lost $300 a month in winter: $1,200$300 = 4 months of runway.
Fixing the gap
You can't always make customers pay faster, but you can change the timing. Ask for a deposit, shorten your terms, ask suppliers for longer terms, keep a cash cushion (like your emergency fund, Lesson 3.2), or line up a small business line of credit before you need it.
- A 50% deposit
- The club pays $4,000 × 0.50 = $2,000 up front. June: $500 + $1,000 + $2,000 − $1,550 = $1,950. No dip below zero.
What you're looking at: your bank balance at the end of each month, June to September, with the club's 100-tune-up order. Every regular month adds $450. Bars below the line mean the account is overdrawn. Try a deposit, faster terms or more starting cash.
Two minutes. Just listen.
Tap any line to jump to it.
Cash or crash.
Eight cash-flow questions from small businesses. Each one gives you the numbers. One try each.
What you're looking at: made-up small businesses. Each lists what happened with its money, then asks one question.
The logic, step by step.
Before you take on a big order, run these three steps.
Step 1: Write down when, not just how much
- The club order
- $1,000 of parts out in June. $4,000 in, in August.
Step 2: Find your lowest point
- The low point
- June 30: −$50.
Step 3: Fix the timing before you get there
- The fix
- A 50% deposit turns June's −$50 into $1,950.
Worked example: how small can the deposit be?
- The gap. Without a deposit, June ends at −$50.
- A safety buffer. You want at least $300 left on June 30, one month of fixed costs.
- What you need. $300 − (−$50) = $350 of deposit.
- As a percent. $350$4,000 = 0.0875, about 9%. Asking for 10% up front covers it.
- The lesson. A small deposit can be the difference between a great month and a bounced rent check.
Bears plan for winter.
In late summer and fall, bears eat almost nonstop, building up fat. Then they spend the winter in a den, often eating and drinking nothing for months. Their fat is their cash cushion: no income comes in, but the bills of staying alive keep coming.
What you're looking at: an illustration, not data. On the left, a bear eating berries in fall. On the right, the same bear in its winter den, living off the fat it stored.
Why this sticks. A bear that goes into winter too thin doesn't make it to spring, no matter how good next summer will be. A business that runs out of cash before customers pay is the same: the future profit never arrives.
The page you'd copy down.
- Profit counts a sale when you make it. Cash counts it when you're paid. June: $3,450 profit, −$50 cash.
- Ending cash = start + cash in − cash out. $500 + $1,000 − $1,550 = −$50.
- Accounts receivable: owed to you ($4,000 from the club). Accounts payable: you owe suppliers.
- Net 60: the bill is due within 60 days.
- Runway = cashmonthly burn. $1,200$300 = 4 months.
- Fixes: deposits, shorter terms, longer supplier terms, a cushion, a credit line. 50% deposit: June ends at $1,950.
Fill in the blanks
Grab a friend or a study group.
Forecast race
Make up a business with a big order paid late. Each person builds a 4-month cash forecast on paper. Who finds the low point first?
Negotiate it
One person is the owner, one the customer. The owner asks for a deposit or faster payment. What arguments work?
Slider challenge
Using the chart above with $0 of starting cash, what's the smallest deposit that keeps every month at zero or above?
Just you and your money.
These stay on this device. Nobody else sees them.
Exam-style questions.
Written the way a college exam would ask them. Each right answer on the first try is worth 10 xp.
On the job: you're a small-business banker
A landscaping company asks your bank for help. Here's its situation:
- Cash today: $5,000.
- Every month: $4,000 comes in from regular customers and $4,000 goes out in fixed costs.
- A new job: $20,000, but it needs $8,000 of materials and crew pay this month.
- The customer's terms: net 60, so the $20,000 arrives in two months.
Your task: what's the company's cash at the end of this month? Is the job profitable? What are two ways to close the gap?
See a model answer
This month's cash: $5,000 + $4,000 − $4,000 − $8,000 = −$3,000.
Is the job profitable? Yes: $20,000 − $8,000 = $12,000. The problem is timing, not profit.
Fix 1, a deposit: 30% up front is $20,000 × 0.30 = $6,000, so the month ends at −$3,000 + $6,000 = $3,000.
Fix 2, a line of credit: borrow about $3,000 to $4,000 now and repay it when the $20,000 arrives. The interest is small next to a $12,000 profit.
Timing is everything.
What you're looking at: a map of where this lesson fits in the course. Read it left to right: the lessons it builds on, this lesson in the middle, and the lesson that comes next.
- Back · Unit 11Will your business make money?
- Back · Unit 3Build an emergency fund
- Back · Unit 4Car, student and payday loans
- You are hereProfitable and still broke
- Next · Unit 11Making it official