What Exactly Is Cash Flow?

Generally, cash flow can be defined as the growth in the accessibility of monetary resources as well as the application of these resources in the business during a stipulated period of time. 

Some business owners have uncertainties about cash flow, and this explains the flawed management of their businesses resulting in poor choices. All aspects of business, including commercial operations, financial, and investment endeavors, are affected by its cash flow.

A business or an organization鈥檚 success is linked to its ability to track the movement of money in and out of the business and keeping proper records of cash flow statements. This insures the business against cash shortfalls and enables it to scale. 

Cash Inflow vs. Cash Outflow

Cash inflow is the money that goes into a business while cash outflow is the money the business disburses. A company is healthy if its cash inflow is considerably greater than its outflow. Businesses with lesser inflow than outflow over long periods may be at a risk of bankruptcy. 

Examples of cash inflow includes:

  • Sales of goods 
  • Delivery of services
  • Sale of fixed assets and investments
  • Bank loan receipts
  • Collection of principals on loans
  • Director鈥檚 loan to business
  • Bank Interests
  • Supplier refunds
  • Grants 
  • Funding revenue

Examples of cash outflow includes:

  • Tax
  • Salaries
  • Overhead costs
  • Dividends paid
  • utility
  • Purchase of inventory
  • Purchase of property and equipment
  • Interest expenses on loans
  • Loans to other commercial entities
  • Redemption of preference shares at premium or discount

All business operations and investments generate cashflow receipts and payments. While it may seem like constant cash inflow means that the business鈥檚 finance is healthy, it is not advisable to regard one鈥檚 cash flow as positive based on inflow alone. Businesses must always consider expenses, general operational responsibilities and financial obligations of the business enterprise that result in cash outflow.

Without carefully monitoring cash flow, a business is susceptible to running out of money when they need it the most in spite of having accumulated high returns on sales, service provision and/or investments.

Negative and Positive Cash Flow

When there is positive cash flow, the business is well equipped to handle its overhead expenses. It can invest in new opportunities that arise and also save considerable amounts for rainy days or unforeseen circumstances. 

Negative cash flow means that the business dispenses more cash than it takes in during a given period. Negative cash flow isn’t always a bad thing as many new businesses make more investments than sales. Hence, they are prone to run out of cash. Free cash flow is the amount of cash left after companies pay for their operating expenses and capital expenditures. 

How to Go from Negative to Positive Cashflow

As we mentioned earlier, negative cash flow isn’t always a bad thing. However, long-term negative cash flow can be detrimental to the company’s health. But, all is not lost. There are steps that can be taken to recover from prolonged negative cashflow. Use these tips to move from negative to positive cash flow;

路        Analyze expenses and cut Operating Costs

Excessive spending is one of the major causes of negative cash flow. Control your spending by weighing the risk and rewards of any expenses carefully before making a decision. 

路        Change your payment terms

Request that customers pay for the goods or services they purchased immediately. Reduce the payment window for customers and optimize your payment channels.

路        Set a budget

Budgeting helps you to better allocate your funds while keeping to your expense and overall financial goals. Sticking to your budget will counteract the effect of negative cash flow by preventing overspending.

路        Increase Revenue

Develop strategies to boost your revenue from existing customers. You can do this by running promotions that encourage large orders, training your sales staff, and targeted advertising. 

路        Get a loan

In extreme situations where increasing revenue doesn’t work or may take too long, a loan might be your only option. Ask your investors for some funding or get a loan from the bank.

Cash Flow Vs. Profits

In any case, the unavailability of cash should not be misunderstood to mean that the business is running at a loss, as cash and profit are two different concepts. A business could have huge sales but it doesn鈥檛 neccesarily translate to accessible funds or cash at hand, This is especially true if it does not receive cash payments from customers at the point of sale and/or delivery or purchases are done on credit or paid through cheques. 

In a situation where customers are yet to pay for the goods and services they used, profit may have been made on paper, but cash flow won鈥檛 increase. Such money should be appropriately recorded under accounts receivable as the customer owes it and yet to be remitted.

Cash Flow Analysis

Cash as an integral business resource impacts its finances, investments, and operations respectively. Cash flow analysis shows the trend of expenditure and alterations in the spending and savings attitude of the organization. It also provides insights on its capacity in terms of servicing short or long-term loans and embarking on financing capital intensive projects.

The analysis of cash flow divulges the movement of an organization鈥檚 funds internally. This is done for a designated period of time; monthly or quarterly. For some businesses, monthly analysis is insufficient for the range of data available for examination. As such, to get a true representation of the trends in such businesses, long periods are more appropriate.

With respect to cash flow information, the accountant of a business must be detailed enough to keep proper records in order to best determine how it is faring financially and provide accurate forecasts. These forecasts rely on expenses, revenue, and inventory projections matched against the expected time of payment by customers.

At Find UK Accountant, our growing network of professionals are competent in maintaining proper cash flow statements. We understand how overwhelming business and we help you take the weight off your shoulders. Start by telling us your needs regarding cashflow, and we will send you quotes from different accountants that can help. Complete our quick form to get requisite assistance. 

Disclaimer: We don鈥檛 take any responsibility for actions taken based on above information. Please speak to our consultants if you need more information. This guide was written specifically for FindUkAccountant clients. By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details are correct at time of writing.