Knowing what comes in and out of your business account is vital. It’s important to understand what cash flow is and the importance of managing it. Ensuring your cash flow is correct is key to the success of your business. If you want to learn more, continue reading for our helpful guide to business cash flow.
What is Cash Flow in Business?
What is cash flow in business? Cash flow in business refers to the amount of money flowing in and out of your company. The cash flow of a business is usually tracked over a period of time.
Knowing how much cash is coming in and out of your business is essential for several reasons.
Keeping up to date with your business’s cash flow means you can track how much is being spent and whether more is spent than received (referred to as positive and negative cash flow). But what do these key terms in cash flow mean?
- Positive cash flow – more money is flowing in than going out
- Negative cash flow – more money is flowing out than going in
For example, if you had several products on your site that came to £100 but didn’t manage to sell any for one day, no money would have flowed into your business that day. Essentially, this means that you had a negative cash flow that day. However, a business’s cash flow is usually reported monthly, quarterly, or annually.
Cash Inflow and Outflow
Cash inflow and outflow refer to how much money your business is receiving and spending. Inflow typically includes payments from your business’s revenue from products or services you provide, whereas cash outflow is mostly operational expenses. Additionally, you should be aware of other key cash inflows and outflows.
Cash Inflow Examples
- Returns on investments
- Financing activities
Cash Outflow Examples
- Payments to suppliers
- Wages
- Rent (for offices)
- Ongoing bills
- Business tax payments
- Loan repayments
- Reinvestments in your business
- Dividends to company shareholders
The Importance of Managing Cash Flow
Simply put, cash flow management means keeping track of your business’s finances and monitoring them closely compared to any outgoings, such as salaries and ongoing bills.
Cashflow management allows you to see how much your business has spent against the amount of money flowing in. Keeping an eye on your cash flow means you can ensure profit is still being made despite cash outflows.
Managing your cash flow is vital to ensuring business success. No matter the size of your business, managing your cash flow is key to survival.
Without efficient cash flow management, your business could potentially fail. There are several other reasons why managing your cash flow is important:
- Understand your spending better
- Make efficient business decisions
- Efficient financial planning
- Allows for business growth
- Improve business relationships
If your business isn’t able to make payments on time, has continuous negative cash flow, has to rely on other funds (like personal accounts), can’t keep records efficiently, and never reviews spending, you’ll likely need to work on improving your cash flow management.
Cash Flow Statements
Cash flow statements (CFS) allow businesses to keep track of the inflow and outflow of cash. These important statements provide insight into the financial health of your business and how well it has been able to operate.
Statements are vital when managing your cash flow. As well as a balance sheet and income statement, a cash flow statement is considered an important financial document.
Cash flow statements round up how much money has been received and how much has left your business. They also highlight the efficiency of your cash flow management.
Another key financial tool is a cash flow forecast. Cash flow forecasts help you estimate the expected cash flow for your business. It also allows you to estimate how much cash is flowing out, and whether or not you’re in a good financial position.
Like cash flow statements, forecasts are incredibly useful for any business. A short-term cash forecast can help identify any immediate issues with business funding – showing whether your business requires more cash to survive in that time period.
Key Differences Between Cashflow and Profit
Cash flow and profit aren’t to be confused. Although they both involve your business’s money, the two are separate. But what are the key differences to be aware of?
| Cash Flow | Profit |
|---|---|
| Shows how much money flows in and out of your business | Shows how much money is left over after business expenses have been paid |
| Reported using a cash flow statement | Reported using an income statement |
| Positive cash flow indicates a business can sustain operations without relying on other finances | Increased profit indicates the long-term, financial success of a business |
Management Reporting at DH Business Support
If you require constant visibility on your business’s performance and want to hit your targets on time, look no further than DH Business Support.
We’re more than just your regular accountants – our services allow you more time to focus on other important aspects of both your business and personal life.
Our expert finance specialists are here to help reach your business goals. With clear communication, ongoing support, professional advice, and guidance, we can hit your targets. Having worked with a diverse range of clients, you can trust us to work alongside your business.
By choosing our management account service, you’ll be equipped with a fully reconciled set of accounts, either monthly, or quarterly.
We provide a report pack on your cash flow summary, balance sheet, and profits and loss account, to name a few. Additionally, if you need advice on handling taxes from your cash outflow, our dedicated tax advisers are on hand to assist you.
To find out more about our services, we encourage you to get in touch with our team today! We look forward to hearing from you soon.