Cash flow and cash flow management

Effective cash flow management is the lifeblood of any successful business. Understanding the nuances of cash flow—how money moves in and out of your business—is crucial for maintaining liquidity, meeting financial obligations, and supporting growth.

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In this guide we will cover

Our guide delves into the essentials of cash flow, providing insights and strategies to manage it efficiently. From tracking incoming and outgoing funds to planning for future financial needs, mastering cash flow management can help ensure your business’s financial stability and long-term success.

What is cash flow?
Types of cash flow
Cash flow management
Cash flow strategies
Cash flow statement
How to increase your cash flow

What is cash flow?

Cash flow is the movement of money in and out of any business. It represents the operating liquidity available to a business and cash on hand is the easiest measurement of the health of a business. Businesses generate revenue from sales (inflow) and incur expenses (outflow). Poor cash flow can often lead a small business into the ground. Understanding cash flow is essential for maintaining the financial stability of your business.

Prospa helps small business protect their working capital by providing funding to keep cash flow moving well.

Cash Flow FAQs

Without healthy cash flow, your business will run out of money. It’s really that simple. Too many expenses and not enough money coming into your business to cover them all will lead your business into very big problems, very quickly. If it is unable to cover expenses then it is unable to operate. If there’s no money left after expenses then there is no money to look for more opportunities and keep your business competitive within your market. So it’s incredibly important to stay on top of the numbers and keep an eye on what’s coming.

Revenue is the total amount of money generated from sales of goods or services before any expenses. Profit, or net income, is the remaining amount after all expenses, taxes, and costs are deducted from revenue, indicating the company’s financial success. Cash flow, recorded on the cash flow statement, represents the movement of money in and out of the business, reflecting its liquidity and ability to manage cash for operations, investments, and financing activities. While revenue shows total earnings, profit reveals actual financial gain, and cash flow demonstrates the company’s cash management capability.

Free cash flow (FCF) is the money you have left over after all expenses to reserve for seizing new opportunities. It is the money free of all other financial constraints which you can use for innovating and staying competitive.

The basic formula for calculating free cash flow is:
Free Cash Flow=Operating Cash Flow−Capital ExpendituresFree Cash Flow=Operating Cash Flow−Capital Expenditures

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Types of cashflow

Operating Cash Flow

Operating cash flow refers to the cash generated from the core business operations. It includes revenue from sales and cash payments for expenses like salaries and supplies. Maintaining positive operating cash flow is crucial for the sustainability of daily business activities.

Investing Cash Flow

Investing cash flow involves cash transactions for buying and selling assets, such as equipment or property. This type of cash flow is critical for long-term business growth and expansion. Positive investing cash flow indicates that a company is investing in its future.

Financing Cash Flow

Financing cash flow relates to transactions involving debt, equity, and dividends. It includes obtaining funds from investors, repaying loans, and issuing dividends. Effective management of financing cash flow ensures the company can fund its operations and growth strategies without financial strain.

Cashflow Management

Cash flow management involves monitoring, analysing, and optimising the net amount of cash receipts (revenue) minus cash expenses. Having a clear picture of the financial workings of a business is one of the fundamentals contributing to a business’s success – and this is mainly achieved through effective cash flow management.

The primary objectives are to ensure that your business has sufficient liquidity to meet its obligations and to maximise the use of cash resources. Cash management involves disciplined monitoring, forecasting and planning over the longer term to allow the business to be prepared for any financial situation or opportunity that arises in the short term too.

The financial workings of a business can be divided simply into three areas that cover the inflows and outflows of cash from the business. These are accounts receivable, accounts payable and inventory, all of which fall under the overarching banner of cash management.

What to consider when managing cashflow?

Cash flow management will help you keep a tight hand over expenses and maintain stress-free financials.
Here are some things to consider to help your business maintain a healthy cash flow.

Stay on top of your paperwork
Keep an eye on money coming in and leaving your business
Develop a cash flow forecast
Maintain a workable budget
Pay attention to accounts payable and accounts receivable
Be prepared with a loan, line of credit or overdraft

Cashflow management FAQs

Effective cash management and planning can help ensure there’s enough of a cash balance on hand for a business to make purchases and take advantage of growth opportunities, it can assist the business to monitor cash flow requirements and pay bills, it helps the business plan for capital expenditure, and can put the business in a position to negotiate better finance terms. All these things are vital for a successful business.

There are plenty of online tools available to help with cash management. Here’s a free cash flow forecast spreadsheet to help you stay on top of your business cash flow and find out where your finances might need a boost. Download template here.

There are plenty of tools available to help, but why not start with this free cash flow forecast template. This ready-made spreadsheet will help you stay on top of your business cash flow and find out where your finances might need a boost.

Effective Strategies to manage cash flow

Cash management can seem complex. However there are simple strategies that small businesses can adopt to help improve their financial situation. While some strategies for managing cash flow might work for one business but may not be right for the next, so a combination of the following can be a great addition to the business’s cash flow risk management practices.

Help ease the stress on your cash flow and boost the balance of your deposit accounts with these simple cash management tips, perfect fundamentals for small businesses to add to their corporate process.

Review Expenses

Find ways to save money and improve your financial situation through cutting expenses. Ask suppliers about any discounts they offer, diversify into different customer groups, plus consider using up existing inventory before purchasing new inventory. You could even consider hiring part-time or contract employees instead of full-time employees.

Cash Flow Forecasting

Forecasting cash flow involves predicting future cash inflows and outflows to anticipate periods of cash surplus or deficit. Utilizing tools and techniques such as spreadsheets or specialized software can help create accurate forecasts, allowing for proactive financial planning.

Increase your margins

Boost working capital by either increasing what you charge or reducing the cost to produce or provide it. If there’s a strong demand for your product or service (or it’s something unique) this will likely be easier.

Charge a deposit

Asking customers for a deposit is more than reasonable, especially for larger priced products or in service-based industries. While not all clients may be willing – it’s worth asking as it will definitely improve your cash balances.

Talk to your suppliers about extended payment terms

Trust and being upfront is important, and your suppliers want to keep your business, so they could well agree. If they don’t, see if you can find an alternative supplier who will be more supportive of your working capital requirements.

Encourage customers to pay faster

Offer a small discount for early payment which can be an attractive proposition for some customers, especially with regards to their own long term cash management situation.

Managing Receivables and Payables

Effective management of accounts receivable and payable is vital for maintaining healthy cash flow. Implement strategies like offering discounts for early payments, conducting credit checks on new customers, and negotiating favorable payment terms with suppliers to optimize cash flow.

Budgeting and Cost Control

Budgeting helps in planning and controlling expenses, ensuring that spending aligns with revenue. Implementing cost control measures, such as reducing unnecessary expenses and finding cost-effective alternatives, can significantly improve cash flow.

Optimising Inventory

Managing inventory efficiently can free up cash tied up in unsold goods. Techniques such as just-in-time inventory, regular inventory audits, and demand forecasting can help maintain optimal inventory levels and improve cash flow.

Securing Financing

Securing adequate financing can help manage cash flow more effectively. Explore financing options such as lines of credit, business loans, and factoring. Each method has its pros and cons, and choosing the right business credit depends on your business’s specific needs and circumstances.

Analyse Cashflow with Cashflow Statement

Analysing cash flow with a cash flow statement is essential for understanding a company’s financial health and operational efficiency. By examining this statement, businesses can assess their liquidity, identify trends in cash generation and usage, and evaluate their ability to sustain operations and meet financial obligations. It highlights the sources of cash, such as revenue from sales and financing activities, and the uses of cash, including capital expenditures and debt repayments. This analysis helps stakeholders make informed decisions about resource allocation, investment opportunities, and strategies for improving cash management, ultimately ensuring long-term financial stability and growth.

A cashflow statement is central to cashflow management. It is a report that consists of a detailed overview of all the business’s cash flow situation and health of your business. It shows the amount of money coming into your business accounts versus the expenses going out and the total at the bottom is the net cash flow you have left over, or the shortage you may be carrying month to month.

Whether you do it yourself, hire an accountant or bookkeeper, or employ a financial controller in-house – effective monitoring of available working capital (or cash management) can help a business to remain competitive, be financially flexible and be ready for any growth or investment opportunities.

Tips to Increase Cashflow for Small Businesses

If money flowing out of your business is faster than money flowing in, you need to take action. There are a number of things you can do in the short term that will make an almost immediate difference:

Save money by cutting costs

Look at where you could be saving money in the business, cutting overheads and costs that aren’t essential to the running of the business. You may only need to do this in the short term to get you through a seasonal fluctuation – but it never hurts to do this anyway.

Reduce stock on hand

The stock you have on your shelves or in the warehouse can be turned in to cash quickly through offering a range of discounts or by having a sale. You can also order less stock during times of fluctuating business cash flow.

Talk to suppliers about payment terms

This isn’t ideal, but your suppliers may be happy to wait a little longer for your payments during times of cash flow crunch.

Chase invoice payment

If you stay on top of your accounts receivable your customers are less likely to miss payments. You could also offer a small discount if they pay early or add new payment options to make it easier for them to pay.

Delay expansion plans

Expansion can be a big expense without immediate gain. So if you are planning to expand, perhaps consider waiting until your business cash flow is in better shape.

Will growing my business increase business cash flow?

Growing your business is a longer term solution that can contribute to increased business cash flow. Business growth doesn’t necessarily mean a bigger premises or more customers, it can be as simple as making a small but significant change to existing processes.

For instance you could update your website more often, invest in an online booking system, employ a good small business accountant, add a couple of extra tables to your restaurant, open longer hours, do a sales promotion or some marketing for your product or service, or even offer a discount for bigger orders.

Signs of cash flow problems include frequent overdrafts, difficulty meeting payroll, and an increasing accounts payable balance. Addressing these issues early can prevent more severe financial difficulties.

Cash flow management tools to add to your small business

Customer success story: Bakers & Co

How to use business credit wisely for cash flow and growth

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