What is cash flow?

Cash flow is the movement of money through your business. It’s made up of the income, outgoings and existing cash in the business, and doesn’t include any assets or investments your business might have.

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What is cash flow?

What is a cash flow forecast?

The term ‘cash flow’ means the amount of cash and cash-equivalents that flow in and out of your company.  There are various ways cash can enter your business; whether it's through customers buying products and services or accounts receivable.

Cash can also leave your business in the form of expenses and accounts payable. If you’re looking to create value for shareholders, your business should aim for positive cash flow.

Businesses usually work out their cash flow on a monthly basis, then roll that figure over each month to keep track of the financial health of their business.

How to calculate net cash flow

When a business creates a monthly or quarterly cash flow statement, it should separate the findings into three main types of cash flow: 

  • cash flow from operating activities

  • cash flow from investing activities 

  • cash flow from financing activities

Why does cash flow matter?

If a business has positive cash flow, it suggests that its liquid assets are rising, allowing it to meet debts, pay expenses and grow easily. It also implies that the business has a financial ‘buffer’, making it more resilient in challenging times. Negative cash flow, on the other hand, suggests that a business’ liquid assets are falling and could need further financial support should things continue to fall.

What's more important - cash flow or profit?

Cash flow is the money that flows in and out of a business whereas profit is the money left over after a business has subtracted expenses. Profit is used to determine how successful a business is; cash flow is what enables the business to remain operational. Either way you look at it, it’s important to manage your business’s cash flow even if you're already profitable.

How to calculate cash flow

Working out your own business’ net cash flow, you simply need to add up your incomings and cash to work out the total cash balance. This will include your bank balance and your business’s overall income including any outstanding invoices.

Then add up your expected outgoings (eg. wages, rent, maintenance payments etc.) and take away your total outgoings from your total cash balance to work out your net cash flow.

(Cash + Income) - Expenditure = Cash Flow

What is a cash flow forecast?

Calculating cash flow is a great way to track your business’s finances, but you can also use cash flow to predict how much money you’ll need.

A cash flow forecast will give you an idea of how much money your business will have in the future and will give you the opportunity to plan for any expected peaks or dips in business. It’ll also help you budget effectively for any new stock, equipment or employees.

It’s also useful to compare your cash flow forecast with your actual cash flow as it will help you understand if your business is meeting its financial expectations. It also indicates if there are any parts of your business that need some rethinking or restructuring to help streamline it.

What is a cash flow statement?

A cash flow statement is a snapshot of how money moves through your business. Also known as a statement of cash flows, it’s a document that summarises the key details from your cash flow.

Publicly trading companies have to make a cash flow statement as part of their quarterly financial report. Although other businesses don’t have an obligation to create a cash flow statement, it’s a really useful document to have and can help with managing cash flow.

Banks and investors might want to see your cash flow statement when they’re looking into whether they’ll invest in the business. A cash flow statement is essentially a tidier version of your full cash flow report — a version you’d be happy to show other people.

What are the main causes of cash flow problems?

A number of issues can cause cash flow problems. An example could be simply that your business is experiencing low profits or even losses. It may have over-invested or stockpiled or even be waiting on unpaid invoices. 

Cash flow problems can also occur due to seasonal dips in demand, or during unprecedented times such as the Coronavirus. During 2020, many businesses in the UK experienced cash flow issues as the lockdowns were implemented. The business 

What is negative cash flow?

Negative cash flow simply refers to a company spending more money than it has coming in. Lots of businesses, particularly new ones, experience negative cash flow. Whilst it’s common in the beginning, it's not possible to sustain a business over a longer-term with negative cash flow.

How can cash flow problems be avoided?

If you’re concerned about your cash flow or want to avoid any future issues, there are a few things you can do as a business owner. This includes meeting any of your payment obligations, managing stock effectively, accessing credit, curbing any unnecessary spending and keeping a cash flow forecast. 

Can you have a positive net income and negative cash flow?

Yes. It’s possible for businesses to have a positive net income with negative cash flow as having positive net income shows that a business is liquid.  Having a positive cash flow shows that a business’s liquid assets are increasing, so negative cash flow can simply mean the assets haven’t increased.

Understanding Cash Flow

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