The Ins and Outs of Cash Flow – Part 1

February 1, 2013

Cash flow is essential to the operation of any company but many small business owners don’t understand the fundamentals of what it really is and therefore, how best to manage it. In part one of this series we look at the basic definitions, followed by management strategies in part two.

What is cash flow?

Cash flow is the movement of funds in and out of your business that should be tracked weekly, monthly or quarterly. Cash flow is an important factor to any small to medium sized business, as with no cash, there are no profits.

Essentially, there are two types of cash flow:

  • Positive cash flow occurs when the cash coming into the business from sales, accounts receivable and so on, is more than the amount of the cash leaving the business through accounts payable, monthly expenses, salaries and the like.
  • Negative cash flow occurs when your outflow of cash is greater than the incoming cash. This usually means concern for a business, but there are steps that business owners can take to help the situation and generate or collect more cash while maintaining or cutting expenses.

To achieve a positive cash flow, it needs to be maintained and monitored regularly to better control the inflow and outflow of cash. Undertaking cash flow analysis regularly will assist business owners in knowing if they will have enough cash each month to cover their payments.

A negative cash flow does not signal the end of a business though and it is quite common in new businesses, but if continued for too long, it can result in some major issues.

A positive cash flow is actually needed to generate profits and have capital for growth, so structuring your business to have a positive cash flow is the best way to grow a business and increase profits.

Ask yourself these questions to get a sense of whether you have your business’ cash flow situation under control:

1. What is my cash balance right now?

2. What do I expect my cash balance to be six months from now?

3. What is my ratio of incomings to outgoings?

If you are unsure, then it’s time to create a cash flow forecast that will assist you in tracking your cash flow results every month to determine if your management is creating the type of cash flow your business needs to sustain growth.

If you have some questions about your cash flow, contact your local First Class Accounts Bookkeeper by clicking here or call us on 1800 082 066 to help with reporting and management

Financial Management