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 assets or investments your business might have.

Get cash flow finance

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 assets or investments your business might have.

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

What is cash flow in finance?

The term ‘cash flow’ means the amount of cash and cash-equivalents that flow in and out of your company.  Cash can enter your business through customers purchasing products or services and accounts receivable.

Cash can leave your business in the form of expenses and accounts payable. To create value for shareholders, businesses should aim for positive cash flow.

How to calculate cash flow

To work out your business’s net cash flow, add up your incomings and cash to work out your total cash balance. This includes your bank balance and your business’s income, for example from outstanding invoices.

Then add up your expected outgoings (wages, rent, maintenance payments etc.). Then 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 good 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. This will help you understand if your business is meeting its financial expectations and indicate if there are any parts of your business which need some rethinking.

What is a cash flow statement?

A cash flow statement is a snapshot of how money moves through your business. It’s sometimes called a statement of cash flows and it’s a document which summarises the key details from your cash flow.

Publicly trading companies are required to make a cash flow statement as part of their quarterly financial report. Although other businesses have no obligation to create a cash flow statement, it’s a really useful document to have and can help with managing cashflow.

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.

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 more easily. It also indicates that the business has a financial ‘buffer’, enabling it to be more resilient in challenging times. Negative cash flow, on the other hand, suggests that a business’ liquid assets are falling. 

What are the main causes of cash flow problems?

A number of issues can cause cash flow problems. For instance, your business could be experiencing low profits or even losses. It may have over-invested or stockpiled or be waiting on unpaid invoices. Cash flow problems can also occur due to seasonal dips in demand. 

What is negative cash flow?

Negative cash flow simply refers to a company spending more money than it has coming in. Lots of businesses, especially new ones, experience negative cash flow, however its not possible to sustain a business long-term with it.

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. 

How can cash flow problems be avoided?

There are a few things businesses can do to keep their cash flow in check, including meeting payment obligations, managing stock effectively, accessing credit, curbing unnecessary spending and keeping a cash flow forecast. 

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

Yes. Having positive net income shows that a business is liquid and positive cash flow shows that its liquid assets are increasing. 

What are the 3 types of cash flow?

When a business creates a monthly or quarterly cash flow statement, it should separate the findings into cash flow from operating activities, cash flow from investing activities and cash flow from financing activities.