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2 years ago
Business Cash Flow Guide
Managing cash flow is one of the most important aspects of running a business. Whether your business is a startup or a larger business with significant cash reserves, having a strong understanding of your finances is vital to the success of your business. In this guide, we cover everything you need to know to manage your business cash flow, allowing you to build up your cash reserves so they're available when you need them the most.
What is Business Cash Flow?
"Cash flow" is a term that refers to the net amount of cash transferred in and out of a company. Subsequently, money your business receives can be seen as cash inflow and money your business spends can be seen as cash outflow. As an oversimplification, if you want your business to succeed, you want to see a higher cash inflow and a lower cash outflow.
Why is Cash Flow So Important?
A cash flow statement provides a clearer understanding of how much cash is available to your business. It's an important process to understand, regardless of the size of your business or how long you've been operating.
If your cash flow falters and money runs out temporarily, you'll face difficulty paying bills and salaries, as well as growing your business. Concurrently, to ensure your business always has enough cash to operate without issue, it's important to produce and monitor a detailed cash flow statement.
Using a Cash Flow Statement as part of a Financial Statement
There are a variety of useful financial statements your business can produce, however, a cash flow statement details the following:
What money your business is owed.
The money your business owes.
How much your business has in reserve.
Subsequently, a cash flow statement forms a vital part of your financial statement. This is because a healthy cash flow ensures that your business always has enough funding to cover its costs.
How to Calculate Your Business Cash Flow?
In its most basic form, your cash flow demonstrates the amount of cash paid to your business, minus the cash which is paid out. Concurrently, the result is your cash balance for a particular period of time.
The following example is an oversimplification of a cash flow statement, demonstrating what your cash flow could look like the following for a specific period:
Funds at the beginning of the period | £10,000 |
Cash inflow (net income) | +£90,000 |
Cash outflow (outgoings) | |
Salaries | -£80,000 |
Property and operating costs | -£9,000 |
Purchase of equipment | -£6.000 |
Cash outflow total | -£95,000 |
Funds at the end of the period | £5,000 |
As you can see in this very basic example, the net income combined with the cash at the beginning of the period is higher than the outgoings. Subsequently, this business has a positive cash reserve at the end of the period.
However, in this example, the business has less cash at the end of the period than at the start. Although this isn't an issue for the business at the end of this period, if their net income and outgoings remain unchanged over the next period, they would subsequently soon have no cash left, as shown in this example:
Funds at the beginning of the period | £5,000 |
Cash inflow (net income) | +£90,000 |
Cash outflow (outgoings) | |
Salaries | -£80,000 |
Property and operating costs | -£9,000 |
Purchase of equipment | -£6.000 |
Cash outflow total | -£95,000 |
Funds at the end of the period | £0,000 |
If this pattern continues into the following period, the business won't just have run out of money, they won't have enough capital to pay their bills and operate without falling into a negative balance.
By identifying shortfalls in your cash flow, your business can act quickly to improve its financial situation and avoid potential operational difficulties.
How to Improve Your Business Cash Flow with Sales Forecasting
Through a strong understanding of your market and previous income figures, you can predict your business income through sales forecasting. Accurate sales forecasting can help protect your business by helping you predict how much your business will be paid in the coming months.
Put simply, when used in conjunction with your cash flow statement, accurate sales forecasting is an integral part of your financial reporting.
Improving Business Cash Flow by Cutting Costs
It's important to keep tight control of your spending. However, if you know that your cash flow may be tight, you can identify ways of saving money. Typically, this requires assessing your overheads. There may be ways to lower costs without impacting your business, such as reducing your business energy costs or finding a better broadband deal.
If your business cash reserves are causing operational issues, more drastic cost-cutting measures may be needed. However, you may also want to consider the following options if your cash flow issues are likely to be temporary.
How to Overcome Cash Flow Problems
In the event that your business is struggling with cash flow problems, some financial products can help. It's important to keep in mind that while these products may provide a temporary cash flow solution, improving your income or cutting costs will have a more long-term benefit.
Invoice Finance
If your business has issued invoices which have yet to be paid, it may be possible to sell them to an invoice finance company. An invoice finance company can ease your cash flow difficulties by paying your company for its unpaid invoices for a relatively small fee. You can find out more about invoice financing and whether it's right for you by clicking the link below.
Business Loans
Invoice financing can be a great way to improve your cash flow, but you may want to consider alternative funding methods. A business loan could be the ideal way to improve the financial situation of your business. Alternatively, you could use a loan to pursue alternative income avenues, allowing your business to not just improve cash flow, but to grow. You can find out more about business loans by clicking the link below.
Business Credit Cards
Business credit cards offer a variety of benefits, helping you to handle business expenses and allowing you to take advantage of a range of repayment options. It's important to remember that business credit cards shouldn't be considered a long-term solution to your cash flow issues. However, they can help you in managing your business cash flow. You can find out more about business credit cards by clicking the link below.
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