Bookkeeping – Tracking Cash (Lesson 46)

Of all the assets in business cash is the most valuable and coveted. Keeping track of how much is available and where it goes is the responsibility of the bookkeeper. Often owners have no idea of how much they really have nor how much of the existing cash is earmarked for certain items. This function of accounting is a daily task and ongoing throughout the day.

To properly track cash, the bookkeeper must first understand both inflows and outflows of cash. Secondly, an understanding of basic cash analysis is beneficial in reporting or conveying this information to the owner. This lesson explains these two attributes related to tracking cash. Finally I illustrate a 10 step procedure to analyze the cash account over a future period of time.


Inflows (sources) of cash come from three separate groups. They are operations, investing and financing. The combined dollar value of all three groups constitutes inflows of cash. You may determine this value on a daily basis, but in general I encourage a weekly analysis as the most efficient and effective tracking system. The three subsections below explain the different primary groups of cash inflows:

Operational Cash Inflows

This source of cash inflows appears overwhelming at first. But once you understand the fundamentals, it unfolds into an easily ascertainable number. In general cash inflows from operations comes from two primary sources. First and hopefully the most consistent are cash based sales (cash, checks, debit and credit cards). However some businesses are B2B (Business to Business) types of operations and therefore utilize the invoicing system. This means the business relies on cash inflows from the secondary source – accounts receivable collections. In many situations, both sources of inflows are normal.

To calculate inflows during the upcoming week the bookkeeper should look to the past to predict the future. Based on average sales paid with cash, the bookkeeper can determine with some certainty the week’s cash inflow from this source.

As to calculating cash inflows from accounts receivable, another tool is used. Your communication with the customers as explained in accounts receivable management allows you to determine the value of incoming cash, i.e. who is going to pay this week. By combining these two sources, operational inflows are calculated. There are other sources from operations but they are uncommon. These other operational inflows include refunds and credits. But the most common other source is short-term loans explained in the financing inflows section below.

Investing Inflows

The most common inflow of cash from investing purposes is the sale of fixed and other assets. This may include the sale of rights or assets held for future purposes. This type of inflow is rare and practically nonexistent in small business.

Some novice business managers may think this form of cash inflow is the result of the sale of equity investments (stocks, bonds and mutual funds) because of the term investment. Actually the sale of any marketable security is an operating cash inflow; it is uncommon for small businesses to have marketable securities available for sale. This is due to the short-term liquidity factor and the fact that Generally Accepted Accounting Principles define marketable securities as a form of current assets.

Finance Inflows

This type of inflow is common in small business. This simply a loan from a bank or an investment by the owner(s). The actual loan is most often used to purchase a fixed asset of some sort. Some of the proceeds are not physically deposited into the company’s bank account. However, the value of the loan is still considered an inflow. It is actually an instantaneous in and out of cash.

To assist you in understanding whether a loan is included in financing or as a function of operating inflows I will explain the accounting rule.

If the loan is for less than one year (one full accounting cycle), the loan is called short-term debt. This means the actual value is a function of operational inflows similar in nature to vendors lending money. If more than one year in duration, the loan is called long-term and is therefore a financing instrument and is calculated with the financing inflows (other loans or equity investment).

Operational inflows and outflows are restricted to actual business operations and the corresponding balance sheet accounts (current assets and current liabilities). These balance sheet accounts that are short-term (minus the period of time for the income statement period) include all current asset and liability accounts. Therefore any short-term loan from a bank is considered an operational inflow and not a finance inflow.

Examples of short-term loans include:

  • Lines of Credit
  • Planting (Crop) Loans (bank loans to farmers for the growing season)
  • Seasonal Product/Inventory Loans
  • Floor Plans (dealership loans to finance inventory)

Don’t forget, other finance inflows include capital contributed by the owners, e.g. sale of additional stock.


Just like inflows, outflows are grouped into three distinct groups. These include operational, investing and financing.

Operational Outflows

Outflows refers to cash leaving the bank account. For operations, just look at the income statement to discover the regular expenses. Naturally the most common or frequent outflows relate to production as found in the cost of sales section. This includes:

  • Materials
  • Labor
  • Subcontractors
  • Equipment (Leases, Maintenance, Repairs etc.)
  • Fuel
  • Insurance (Worker’s Compensation, General Liability, Property)

As you continue down into the expenses section of the income statement (profit and loss statement) you find more outflows. This includes:

  • Management (Back Office Labor Costs plus Benefits)
  • Facilities (Rent, Utilities, CAM Fees, Real Estate Taxes)
  • Office Operations (Technology, Office Supplies, Postage)
  • Insurance (General Liability, Professional, Property)
  • Communications (Telephone, Cell Phones, Internet, Radios)
  • Other (Professional Fees, Meals and Entertainment, Transportation)

Each of these costs have different payment cycles and payment processes. All labor related costs are customarily processed through the payroll system. Materials, subcontractors and most expenses are paid through accounts payable. Some expenses are instantly paid using debit card or traditional checks; these include fuel, insurance, meals and entertainment and repairs.

If you look at the current liabilities section of the balance sheet and its structure; you find the accounts most of the above costs and expenses are processed through. Look at this table:

                  Current Liabilities                   Costs/Expenses
       Accounts Payable – Production             Materials/Product/Subs
       Accounts Payable – Operations             Facilities/Office Ops/Insurance
       Credit Cards                                          Fuel/Meals and Entertainment/Transportation
       Accrued Payroll                                     Labor/Management
       Accrued Taxes                                       Payroll Taxes/Income/Operational
       Line of Credit
       Current Portion of Long-Term Debt     12 Months of Principle Due on Notes

Most of the outflows are covered through accounts payable and accrued payroll. But there are operational outflows to include in your analysis with tracking cash. The following identify the three most common operational outflows that are not customarily recurring from month to month.

1) Accrued Taxes – Although payroll taxes occur regularly, other governmental taxes may not happen every single month but do occur regularly. Review the following list:

  • Income Taxes (generally every quarter)
  • Sales and Meal Taxes (some are quarterly, some are monthly)
  • Property Taxes (annually or quarterly)
  • Real Estate Taxes (quarterly)
  • Revenue Licenses (annually)
  • Licenses, Permits, Franchise Tax (annually)

2) Line of Credit – Payments or interest due on the line of credit are considered short-term liabilities and therefore are included as a function of operational outflows.

3) Interest on Note Payments – The principal portion of note payments are a function of finance outflows, but the interest component for debt service is a function of operational outflows.

The key to tracking cash outflows is the understanding that in addition to regular outflows as identified in cost of sales and expenses other outflows exist too. This includes taxes, payments on short-term debt and interest on note payments.

Investing Outflows

This form of outflow occurs more frequently than you may think. Investments refer to the purchase of property, plant and equipment (PPE). On the balance sheet it refers to the purchase of fixed assets. In small business activities I’m specifically referring to the more common fixed assets such as tooling, equipment, and transportation vehicles (trucks, autos and other titled assets).

In addition to the purchase of PPE, investing outflows include those costs for intangible assets such as patents, copyrights and organizational costs. Most of the fixed asset purchases are financed with long-term loans. The cash inflow from those loans was discussed back in the finance inflows section above. However, the loan usually doesn’t cover all the costs of acquisition and the business puts down a significant deposit towards purchase. This is also considered investing outflows.

Finance Outflows

This form of outflow is easy to comprehend. It is strictly limited to two major items:

  1. Principle payments on long-term debt
  2. Payments to owner(s) via draws, distributions or dividends

Cash Analysis

Tracking of cash is simply a process of determining cash inflows and outflows over a certain period of time. The most common time period is one week. To complete this process, follow these steps.


Step I – Inflows from sales is determined for the upcoming period of time. I’m referring to cash sales (cash, check, debit or credit cards). Add to this:

Step II – Inflows from the expected cash receipts associated with the collection of accounts receivable.

Step III – Add to both cash receipts for sales and receivables any inflows from a line of credit draw, sale of equipment and financing inflows (loans or equity input from owners).


Step IV – Determine the value of the cash disbursements run for the week.

Step V – Calculate the entire payroll costs for the week including payroll taxes and benefit payments.

Step VI – Determine the dollar value of all debt service payments (principal and interest) that will get paid in the upcoming week.

Step VII – Add up any potential compliance payments such as taxes, operational payments and any one time payments pending. In addition include any common recurrence debit expenditures such as fuel costs or petty cash needs.

Step VIII – Combine all inflows (Steps I – III).

Step IX – Combine all outflows (Steps IV – VII).

Step X – Subtract outflows from inflows to determine the change in cash expected for the company for the upcoming week.

Don’t forget to include any outflows for one time purchases of fixed assets or payments to owners. Include these in Step VI.

The goal is to manage cash by tracking the inflows and outflows and maintaining a positive operational checking account balance. It is OK to have more outflows than inflows contingent that there is enough existing cash to cover the difference.

Summary – Tracking Cash

Keeping track of cash is essential to the financial well-being and solvency of the company. Tracking cash involves evaluating both inflows and outflows of cash. Both inflows and outflows are a function of operating, investing and financing. The bulk of inflows and outflows are operational in nature. By using the 10 step process of adding up all inflows and subtracting all outflows of cash, the bookkeeper can track the status of cash over a upcoming period of time. Act on Knowledge.

© 2017 – 2022, David J Hoare MSA. All rights reserved.

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