Cash flow is the movement of money into and out of your business over a specific period. This could be a month, a quarter or a year.
When more money comes into your business than goes out, this is a Positive Flow. This means your business has enough money to pay its bills, wages, suppliers and any other running costs.
When more money leaves your business than comes in, this is a Negative Flow. On the other hand, this means it can be difficult to keep up with day-to-day operations which can create unwanted pressure.
Why is Cash Flow Important?
“Cash is king” is an all too common phrase, and for good reason.
Cash is the lifeblood of a business. Even if your business appears to be profitable on paper, it can quickly run into trouble without enough cash to meet its obligations. A business might generate strong sales, but it customers pay late, it could still struggle to pay rent or staff.
Cash Flow vs Profit
Cash flow and profit are two separate metrics:
- Profit is the money left after deducting all your expenses from your income.
- Cash flow, by contrast, tracks the actual movement of money in and out of your business.
A profitable business might still experience cash flow issues if customers take too long to pay. Similarly, a business in a good cash position might not be profitable if it relies heavily on external funding.
Types of Cash Flow
There are three main types, each covering a different area of your business:
| Operating Activities | Cash earned from sales and spent on daily operations such as wages, rent and materials |
| Investing Activities | Cash used to buy or sell long-term assets such as equipment or property |
| Financing Activities | Cash related to loans, investor funding or repayments and dividends |
Managing Your Cash Flow
To manage effectively, you need to monitor the timing of incoming and outgoing payments. The steps include:
- Create cash flow statements which track your monthly inflows and outflows
- Forecast future income and expenses to identify potential gaps in advance
- Improve payment processes by sending invoices promptly and following up on late payments
- Agree payment terms early and clarify expectations with both customers and suppliers
- Control spending by reducing unnecessary expenses and consider renting instead of buying
Managing During Change
Change is a constant in business.
Whether it’s a dip in sales or a rise in costs, it can affect your cash position. During uncertain times, having at least one month of expenses in reserve can make a big different. Ideally, aim for three months.
Handling Growth Periods
Growth often brings additional costs. You may need to increase stock or hire new staff. These outlays usually happen before you receive the revenue to cover them.
Ready to Take Control of Your Cash Flow?
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