Bank balance watching is destined to backfire.

Maybe not today or tomorrow, but sometime.

Instead, we need to understand the why behind cash flow.

Today, we talk about 5 drivers of cash flow and how to manage them.

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Your bank balance is lying to you—look at these 5 cash flow drivers instead

“Wait, I owe HOW MUCH?” This all too common refrain is heard each April after the CPA delivers the tax return.

As a business owner, you’d spent all year watching your bank balance grow, reinvesting into the business, and feeling good about where things are… until tax season hit.

The problem? The money in his account wasn’t actually yours. It belonged to the IRS. And now, you have to scramble to come up with six figures in taxes you hadn’t planned for.

Manage your cash by your bank account? Please stop…

When starting a business from scratch, most business owners effectively manage by bank account. You watch the bank and what goes in and out and get a decent feel for the business.

But then, the business grows. Suddenly, your bank balance is lying to you.

Maybe you’ve been there:

Payroll is due, and you’re frantically calling customers to see if their payments are coming. A major customer ghosts you, leaving a huge unpaid balance. The tax bill arrives, and you realize the “profit” in your bank account was never yours to spend.

Managing by bank account works until it doesn’t. And when it breaks down, you end up stressed, make poor decisions because of bank information, and lose out on opportunities because of uncertainty.

Two businesses can have exactly the same revenues and expenses but live in wildly different realities: One is reinvesting in growth, expanding, and paying themselves well. The other is stuck in a panic loop, constantly waiting for money to hit the bank before making the next move.

So today we’re going to help you be more like #1. We’re going to talk about the drivers to manage the cash flow of your business, which will help you rethink your relationship to the cash.

CASH CONVERSION CYCLE

The Cash Conversion Cycle (CCC) is the number of days between when you spend money and when you collect it. The shorter this cycle, the healthier your cash flow.

Some businesses turn CCC negative, meaning they get paid before they pay anyone.

It has 3 key parts:

• Inventory Days (DIO) – How long it takes you to sell what you’ve bought.
• Receivables Days (DSO) – How long customers take to pay you.
• Payables Days (DPO) – How long you take to pay suppliers.

Your Goal? Get paid faster than you pay others. A few common strategies are:

• Bill upfront or in smaller, frequent chunks
• Offer early-payment discounts to customers
• Automate collections to reduce unpaid invoices
• Negotiate longer payment terms with suppliers
• Improve inventory management to reduce cash tied up (see next)

Look at each variable and ask: how can I improve my number of days.INVENTORY & CAPITAL MANAGEMENTInventory isn’t just “stock”—it’s cash that’s been converted into physical form. If you don’t manage inventory like an investment portfolio, you’ll always be cash-poor.Cash gets stuck in inventory when you overbuy or undersell.For inventory-heavy businesses, two levers matter:

1. Inventory Turns – How quickly you sell through stock.
2. Cost Control – How efficiently you source inventory.

When controlling turns, look at your inventory timing, required reserves, and alternative product management strategies (dropshipping and consignment).Also, better understanding demand will help you reduce excess inventory and better plan future cash spend. Most guess here, but getting a deeper understanding of your market will ultimately be worth it.Cost control is harder than just diving all in with the cheapest supplier and purchasing in bulk to lower cost. Each of these open up other risks, such as supplier lock-in and excess inventory going bad. So with each cost control measure, consider the secondary consequences before diving all-in.SERVICE BUSINESSES & CAPACITYIn service businesses, your inventory is people’s time. Hire to fast and your payroll drains cash before the work recreates revenue.Consider:

• being more strategic in hiring… adopt “just-in-time” hiring.
• look at your billing frequency and implement deposits, upfront billing, etc.

CAPITAL EXPENDITURESBusiness owners often ignore big purchases until the equipment breaks down and forces a decision.This not only creates downtime in your operation, but can result in you not having the cash to fix the issue immediately. This can create more downtown, or result in you taking on debt that is not ideal.Instead, you need to take a proactive approach to managing capital expenditures.Instead, plan for CapEx early:

1. Create an equipment replacement schedule (evaluate new versus used to optimize replacement)
2. Establish a preventive maintenance plan to extend the life of your equipment
3. Analyze lease vs. buy decisions based on cash flow, not preference
4. Set aside CapEx reserves to avoid surprise debt (and dispose of unused equipment to free up capital)

CapEx spending should be intentional, not reactive—otherwise, you end up taking bad loans at bad rates when you’re desperate.If you want to go deeper into planning for capex, I’ve written about ​growth capex​ and ​maintenance capex​. I also wrote about ​how to budget for capital expenditures here​.DEBT & BORROWING CAPACITYDebit is not just about cost, but the flexibility it provides. But it’s easy to be dependent on debt, which reduces flexibility, or pick the wrong debt partners. The wrong debt or bank partner can stifle business growth, while the right one can fuel it.Let me guess… you chose your bank because your buddy either was a banker or recommended one? All banks aren’t the same and the wrong bank can mean bad covenants, higher interest, and a refusal to extend more debt when it’s needed.Banks, just like businesses, have different core competencies and it’s important you pick one that has a competency that aligns with your business needs.With debt, we want to understand:

1. Borrowing Capacity: The ability to get funding when needed
2. Cost of debt (Debt Service): The cost of repaying loans

Increased borrowing capacity allows you to grow quickly and have a margin of error when things go poorly.Reducing your debt service cost (principal and interest payments) when possible gives you more flexibility in the future.Being strategic about your debt looks like:

1. Building strong banking relationships BEFORE you need them.
2. Paying down existing debt when able to, as it increases availability and shows your bank you’re operating in a way that builds trust.
3. Looking for government loan and grant opportunities, as they can often offer better terms.
4. Refinancing high-cost debt when interest rates decrease. Stick with fixed rates where possible, only taking risks on variable rates when you have the ability to pay them down.
5. Finding the right partners to help you understand your debt agreement, covenants, and restrictions.

TAX & CASH RESERVESEvery year, small business owners get a painful tax surprise as I referenced in the opening. What I don’t get… is that it often happens every year, which means with the right planning that it’s avoidable.Same with not holding the right cash reserves. That annual liquidity crisis is predictable and should be planned for.With taxes, the steps to fix this are easy:

1. Set aside a percentage of revenue for taxes every month
2. Pay quarterly estimated taxes (and avoid penalties)
3. Use separate bank accounts for tax reserves

To know your appropriate cash reserves, consider:

1. The stage of business
2. Upcoming capital needs
3. Industry stability & cycles
4. Seasonality of the business
5. Customer & supplier risk

I’ve previously developed a little matrix to help businesses make this decision and ​wrote about it the fall​. It’s just a rule of thumb to think about the amount of risk present in your business. Use it to help you think your risks and then come up with a number that works for you.

Wrapping UpThe biggest thing about understanding your cash flow drivers is being proactive. Most business owners react to cash flow problems when it’s already too late.If you’re always:

• Waiting for customer payments to cover expenses…
• Wondering where the cash went at tax time…
• Stressing about payroll before payday…

You’re playing defense and it’s time to setup better cash tracking systems today.Next week we’ll talk about how to choose the right metrics and integrate them into a reporting system.