Understanding Cash Flow

Written by Julia

On November 13, 2019

Understanding cash flow can be very frustrating. Cash flow can make or break a business, no matter what size, therefore, it’s important to understand what cash flow is and how to achieve and maintain positive cash flow.
 
First things first, what is cash flow? In simple terms: Cash flow is how much money is coming in and out of your business during a specific amount of time.
 

Calculating Cash Flow

 
To calculate your cash flow, you must first come up with a list of how much money is coming into your business, and then how much is flowing out each month. Cash coming into your business may include customer payments, investment returns, funds from sale of assets, etc. Cash flowing out from your business may include money you spend on supplies, inventory, bills, rent, taxes, paying employees, etc.
 

Tip: It is recommended to calculate your cash flow every month as it is easier.
 
The easiest way to think of cash flow is to review your bank account. If you finished your month with more money in the bank than when you first started, that means your business is cash flow positive. If your bank account has less money at the end of the month than when it first started, your business is cash flow negative.
 
Cash flow positive: More money is coming into your business than flowing out your business.
Cash flow negative: Less money is coming int your business than coming in.
 
Calculating cash flow is important to ensure your business is staying afloat. It is recommended to calculate your cash flow monthly because you can follow a pattern, and anticipate future months when your cash may run low. This gives you a chance to plan ahead and perhaps take a business loan or sell investments to keep your business cash flow positive during leaner months. This method is called cash flow forecasting.
 
Tip: It’s better to get a loan, or investment before you’re in a big crisis as lenders or investors may see you as a risk when you’re at your lowest.
 
Deciding whether to get a business loan? Click on Signs you need a business loan to better understand when a business loan is needed.
 

Calculating Cash Flow Formula

Operating Cash Flow (sales) – Capital Expenses = Cash Flow
 

Cash and Profit Differences

 
Profit:
Profits can include revenue that you have made, but have not been paid for yet which is also known as accounts reversible.
 
Cash:
Money you have in your bank account, or in your hands made available for any use.
 

It’s important to keep in mind that what you profit is not the same as cash. You can not calculate your cash flow based on just profit. You can only calculate your cash flow from money that is available to you in your bank.
 
For example, if your company uses invoices, and you made a few sales, you can have good revenue, but if your customer hasn’t paid you yet it not considered cash since it has not reached your bank, therefore, it should not be included in your cash flow statements.

 

Strategies to Generate Positive Cash Flow

 

1. Offer a discount for prompt payments

For businesses who use invoices, and have to wait a certain period to receive funds, offering a discount for customers/clients who pay immediately is a great tool as this can be calculated and used for your cash flow.
 

2. Charge a deposit

If your business is fairly new, or not doing so well, consider asking customers/clients who are providing you with a big project for a deposit. This will help you buy supplies or any materials you need and will also help with your cash flow.
 

3. Draw returning customers

Drawing returning customers/clients is very important to keep your business steady and afloat. A good strategy to reward your best customers and get returning customers is to offer bundling and premium services. This will boost your cash flow, and you will ensure more customers will want to return.
 

Bottom Line
 
You can’t expect to become cash-flow positive overnight, but taking specific steps and with planning, you can get your cash flow to be positive with time. If you take the necessary steps and keep track of your cash flow, you are headed in the right direction and will eventually reach your goals.

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