What is cash flow?

What is cash flow?

Cash flow is often misunderstood yet is critical to the success of any business. Cash flow issues are one of the most significant challenges small business owners face. 4 out of 5 businesses are likely to fail due to poor cash management.

What is cash flow?

what does cash flow mean in business


Understanding your small business’s cash flow is one of the most critical financial metrics a business owner should be concerned with. Cash flow is the activity of cash that comes into and goes out of your business during a specific period. Positive Cash flow affords the freedom to pay your bills, make purchases, cover expenses, and grow your business. While shortfalls in cash happen to all companies, no business can survive if they do not generate cash.

What does cash flow mean in a business?

Cash flow means everything in a business. It is necessary to function, grow, and sustain the ebb and flow of owning a business. There is an old saying – “Cash is King,” meaning it’s the essential aspect and foundation of your business. Let’s do a little Q&A to get a better understanding of cash flow and how it works:

Q: What is the difference between cash flow and profit?

A:  As mentioned, cash flow is the activity of cash that comes into and goes out of your business during a specific period of time. Profit, on the other hand, is more complicated. First, profit can be calculated based on the accrual or cash method of accounting. Without getting too deep into the difference between the two, profit is the amount of money a business generates after paying all expenses. On the cash basis of accounting, profit equals all cash that was received less all cash spent for a period of time. On the accrual basis, profit is recorded based on when transactions are accrued (i.e., when is an invoice is created or when a bill is received) and can include expenses that are non-cash related (i.e., depreciation).

Q: What is the difference between cash flow and revenue?

A:  As mentioned, cash flow is the activity of cash that comes into and goes out of your business during a specific period of time. Revenue is purely money coming into the business. Revenue does not account for the cash going out of the company. Revenue is recognized on a cash basis when your business receives payments for services. On an accrual basis, revenue is recognized when invoices are created.

Q: How do you figure out your cash flow?

A: Figuring out your company’s cash flow can be looked at in a couple of different ways. The first is to review your company’s cash flow over a period of time. In small businesses, this is typically done using a formula for calculating operating cash flow. Utilizing the formula below will provide you with how much cash your business is generating from operations.

how to figure cash flow of a business

Cash Flow from Operations = Net Income + Non-Cash Items + Changes in Working Capital

While this formula tells you how much cash you’re generating, many small business owners are concerned with how many days of cash they have available. This can be calculated with the following formula:

Cash on hand ÷ ((Operating expenses – Non-cash expenses) ÷ 365)

However, this formula doesn’t answer the question of how many days of cash do I have on hand today. This typically needs to be managed daily with a spreadsheet and information from your bank. However, there are now automated tools available to track the number of days of cash you have at all times.

Q: How do you manage cash flow?

A:  Managing cash flow is always an essential part of managing a business. Basic tasks and behaviors can help even a novice business owner understand their cash flow. These behaviors include:

  • Analyze and understand your cash flow statement.
  • Don’t get behind in your bookkeeping. If you do, you will not have the most up to date figures to calculate cash flow. Errors in the process can be quite troublesome, to say the least.
  • Be diligent about expenses and monitor your receivables regularly.
  • Increase cash flow? Mid-market and large corporations typically have ready access to cash that SMB’s simply don’t have. They also have tools in place to manage cash that SMB’s lack. Increases, in some cases, can come from three areas:
  • Cash from investing– Generated investing in long term assets and selling them.
  • Cash from finances– Generated from loans and lines of credit.
  • Cash from operations– Generated from running the business when revenues are higher than expenses, resulting in an increase in cash.

Automated tools assist by capturing your bank, expense, and revenue data. These systems can create an extremely accurate picture of what the current cash flow looks like and tell you how many days of cash your business has on hand.

Q: What is a Statement of Cash Flow?

what is sales revenue vs cash flowA: A statement of cash flow is a financial report showing the sources and uses of cash from all operating and investing activities in a business.

Q: What are the benefits of improved cash flow?

A: It is straightforward. The more money you have coming into your business, the more cash on hand you will have to pay bills, cover expenses, and invest in sales and marketing growth.

Business failure due to cash flow problems.

Many business failures can be avoided with proper financial management, starting with cash flow. The balance in your checkbook does not reflect cash flow. Business owners need to go beyond the checkbook ledger and understand the challenges of balancing cash as it comes into and goes out of their business. It all begins with better bookkeeping.

Understanding your cash flow, automating your bookkeeping, and building a healthier business can be easy. Get clean books and tax-ready financials. We can show you how! Schedule a demo.

Expex is based in Schenectady, NY, offering convenient and innovative bookkeeping services to help your business succeed. Our application, Carly, can do everything a traditional bookkeeper does and more. This financial management program expertly fulfills services such as bill payments, bank and credit card reconciliation, and financial records consolidation. Call (518) 389-2305 today to get started, or contact us to learn more about Carly.