Business 101: Calculating Business Cash Needs


A conversation with a prospective client this week brought up an old topic: running a business based on bank-balance-accounting (you can read more on that topic here). The business owner was a start-up and their prior accountant did set-up QBO for tracking. The accountant stopped as of 12/31, and didn’t provide any training or support. Since the business owner didn’t have the skill set to update their accounting tool, he was left running his business simply based on what his bank balance was, which was the reason for the call: he needed his accounting brought current so he had a better way of managing his finances.

This is the struggle of running your business simply based on your bank balance. To effectively manage your business finances it requires that you know how much cash your business has access to at any given moment. The terminology for this is knowing what your cash position is. There is only two requirements:

First, have a bookkeeping system.
Second, keep that system current.


When business owners run their business based on their bank balance only, they may not properly track items that haven’t cleared. For example, the bank balance might be $1000, but that check you wrote to the IRS last week for $1500 hasn’t cleared, and you don’t know when that may happen. Following the requirements above to track your actual cash position would have already triggered an alert, and shown that you were in the hole $500. Practicing bank balance accounting may cost you an overdraft fee, and extra hoops to run through in handling a bounced check, but if you do that several times over a year, thousands of dollars could be lost in unnecessary bank fees. Your true cash position isn’t what is available today  in your bank account, it is the adjusted cash available after all the activity you have processed to-date clears the bank.

Tracking Cash Position

Early in my career I worked with a business owner who practiced a manual cash position tracking system. Every day she would call her bank, get her balance, and listen to what activity had cleared the night before (yes this was WAY before the days of online bank access). She then tracked on a sheet of paper what had cleared against what items she had written (checks) and deposits processed. At the end was her cash position. It worked for her. Today, with a well set-up browser based accounting tool, keeping your activity current, and a smartphone, tablet or laptop, you can do the same thing in less time.

Spending Intentionally

While technology makes it much easier for us to stay abreast of our cash position, society has gone crazy for plastic, and the continued use of credit cards has created a disconnect from our spending both in our personal and business lives. On top of that, most of us dislike keeping receipts, so the true knowledge of our spending only shows up the next day when it clears our bank account. Which camp do you fall into?

Spend – Ignore – Spend
Plan – Buffer – Spend

The first one I think is self explanatory — a whole lot of unintentional spending + big heaping dose of unnecessary bank fees + stress of the unknown bank balance. If that version doesn’t sound especially fun, then the second option includes:

  • Plan for your expenses = create and maintain a budget
  • Create a cash buffer to cover planned expenses = weekly cash flow planning
  • Track your accounting  = use a browser based solution like QBO or Xero

ADI PROTIP: Having your accounting current will provide you with an estimate of what your normal debit card spending is (ex: gas, meals, coffee, parking, etc). Once you know what your average is, you can use that in your cash flow planning and hold that money aside in your account each week.

Cash Planning

With your accounting tool and process in hand, now you can start looking ahead to create a cash flow plan. Looking ahead 6-8 weeks at a time will show any estimated shortages. No fancy tools are required for this planning, you can use a piece of paper, Excel spreadsheet, or your accounting tool. Don’t skip ahead, though, if you don’t have the basic two steps in place then succeeding at planning will be difficult. The more difficult the process, the more likely you won’t do it for very long.


The ADI Team recommends implementing the Profit First System of creating a “Profit Account” so you can intentionally create a buffer. If you are currently spending as fast as you are receiving funds, creating this buffer will take time, but it is DOABLE! Trust me on this. My own business finances had me hustling each month to create and generate on average $5k in extra finances or cutting costs. Most months that cost cutting came in the form of not paying myself. Fast forward: now I am putting a set percentage of every deposit that I receive into my Profit Account. Since starting this process,  I reduced spending and have more intentionality around my expenses, and I pay myself. My buffer is still small, but it is consistently growing.

To be a successful business owner does not mean you need to know accounting and tax as well as I do. You do need to recognize that timely, proper accounting will allow you access to the numbers to score your success and trigger the questions to ask to keep your business growing. So ask! Be inquisitive, and be empowered by your numbers!

For more info on this topic check out the blog posts about practicing bank balance accounting here and one on cash flow planning here.

ADI PROTIP: To wrap up that conversation I had with the prospective client, for business owners in the $50-100k revenue range, you’ll need to do most of the bookkeeping yourselves. Using a tool that will automate the majority of your recordkeeping will be a great help. Investing in getting support to set-up the tool, including a little training on the process, will get you started in the right direction. While you probably already knew all that, here’s the biggest tip: rather than outsourcing it all do some of it yourself and consult with a bookkeeper once or twice a year. Not just any bookkeeper though; consult with an experienced bookkeeper for two hours. Look for a bookkeeper with technology, tax, industry, and business experience. Two hours of their hands-on consulting will be that extra set of eyes your business finances need. There is no guarantee that two hours will solve all of your problems, but miracles do happen.

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