How to grow your Business

A beginner's guide to cash flow management

Catherine BoxallCatherine Boxall
Last updated on:
December 15, 2022
Published on:
April 12, 2022

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What is cash flow? 

Cash flow is the measurement of net cash that flows in and out of your business during a given period. It indicates a company’s ability to pay its existing liabilities and is a crucial measure of a company’s financial health. This is true for both small business owners and established companies. 

If a company has positive cash flow it is able to pay its current liabilities and invest in its future growth whilst negative cash flow signifies that a company’s expenditure outweighs its income, though this doesn’t necessarily mean that it is operating at a loss. You might seek to increase your cash flow from operations (revenue-generating activities, such as sales) if your cash flow is at break-even point.  

This article provides an overview of cash flow and effective cash flow management strategies. 

Why is cash flow important? 

Cash flow is important as it is a measure of a company's financial health and ability to pay its expenditures. Cash flow is not to be confused with revenue. As mentioned above, cash flow is the amount of money that comes in and out during a specified period of time and represents how much money- or cash- your business has available to keep it operating and expanding. 

Revenue, by contrast, is the money your business makes from its sales and can be used as a measure of how successful your sales are. Similarly, your cash flow is not to be confused with your company’s profits. Your profits are the amount that you take home after your expenses have been deducted from your sales. However, this is not the same as cash flow as your business might be profitable but have a negative cash flow, perhaps through the late payment of invoices. 

Your cash flow will enable you to invest in areas of your business and allocate money to certain activities, such as sales, that can then boost revenue. Having a strong cash flow means that your business has the resources to expand, diversify and implement strategies. Monitoring your cash flow is also important for ensuring that you make payments and requests on time so that you don’t run into any surprises when suppliers or providers ask you for payment. 

Alongside investment in sales, cash flow is also important for making sales forecasts. If you can reasonably predict what your business will sell, you will be able to predict the amount of revenue this will generate so that you can predict the future costs and therefore predict cash needs in the future. 

Banks and investors will typically require your business to have a cash flow forecast in place before they provide you with loans and capital. A cash flow statement will show you the amount of cash coming into your business and the source of these funds. It can also highlight if you have any cash flow problems that may prevent you from being able to obtain finance.

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How to manage cash flow

As shown, being on top of your cash flow is crucial for the continued success of your business. The first thing that you can do to manage your cash flow is to ensure that you are on top of paying your expenses, such as office rent, salaries and invoices on time. Having clear filing procedures and payment reminders is crucial for this.

However, your cash flow will only be accurate if you are also paid for the products and services you provide in a timely manner so you should take measures to ensure that you will receive payments on time by: 

  • Making payments simple with clear invoicing and simple payment methods;
  • Monitor your payment and send reminders, particularly on late payments;
  • Incentivise early payments through early payment discounts and;
  • Credit check customers if relevant to your business. 

Once your business has been operating for a few months you will understand the general time in which customers pay you for your products and services. When you have deciphered typical payment terms, you should make sure that you tailor the payment of your expenses so that you have a balance between outgoing payments and incoming payments. 

In cultivating proper cash flow management, it is important to have policies and processes in place. To avoid poor cash flow management, you might consider:

  • Creating a cash flow statement to conduct cash flow analysis ;
  • Making payment deadlines and processes short;
  • Invoice factoring;
  • Monitoring your company accounts, particularly expenditures;
  • Adopting software that helps you track your finances;
  • Learning to make cash flow reporting and management second nature; and
  • Regularly making cash flow projections.

What is a cash flow statement?

A cash flow statement is a financial statement that provides a detailed summary of the company's cash flow over a period of time. It shows how much cash is available after all of the company’s expenses, investments and debts have been paid.

There are 3 sections to a cash flow statement:

Cash from operating activities - This includes all cash received from selling products or services and deducts all expenses related to buying goods and services. Positive operating cash flow indicates that the core business activities of the company are thriving.

Cash from financing activities - This includes any flow of cash that is used to fund the business operations. This will include any debt, issue of shares, and dividend payments.

Cash from investing activities - This includes all investments made by companies (such as buying another business or property), plus any income received (such as rent payments) from these investments would be classed as cash inflows.

As a business owner, you need to perform a cash flow analysis on a regular basis and use cash flow forecasting so you can take the steps necessary to head off any cash flow problems

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The opinions on this page are for general information purposes only and do not constitute legal advice on which you should rely.

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