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What Is Cash Flow?

Key Takeaways

  • Cash flow is the incoming and outgoing of cash within a business.
  • You’ll need to make accurate cash flow projections to answer critical questions for your business’ future.
  • A cash flow statement helps to track and analyze all your business’ inflows and outflows.

Cash flow is defined as the incomings and outgoings of cash pertaining to the operating activities of a business. For example, a business’ incomings are the receivables (payments) from customers and clients, while its outgoings are its expenses, such as payroll and leasing office space.

The general concept is easy enough to understand, but properly managing cash flow is vital to handling day-to-day operations. It can be the difference between your business heading down a path to success, or being in the red.

However, the level of cash flow generated by your business is not necessarily an indicator of performance. For example, high levels of positive cash flow do not necessarily mean high — or even any — profit.

How to positively impact your cash flow

Consider these six potential sources:

  1. Sell more goods or services that are paid for at time of service or sale
  2. Reduce expenses
  3. Negotiate or take advantage of payment terms to defer payments to vendors
  4. Accelerate collection of accounts receivables (i.e. offer discounts for faster payment, offer electronic payment options versus checks)
  5. Obtain a line of credit to use as an additional short term payment vehicle versus just relying on cash
  6. Research treasury management or cash management products that could assist in accelerating the collection of your payments

Projecting cash flow

Assessing how much cash you have presently is a good first step, but it’s also important to anticipate how much cash you’ll have — and need — in the future.

Projecting your cash flow will help you answer important questions, such as:

  • Will you have enough cash to cover this week’s payroll?
  • How can you afford to bring on an important new vendor?
  • How much revenue do you need to generate to cover your monthly expenses?
    • Do you have enough cash being generated from operations to pay for all the expected expenditures of the business?
    • What are your available funding sources for capital expenditures? For revenue growth initiatives?

In order to do this, you need to estimate your future sales, your cost of sales, changes to payroll, timeliness of receivables, timeliness of payables, and any potential loans or equity contributions that can serve as funding sources in addition to the cash generated by your business.

What is a cash flow statement?

A cash flow statement — or statement of cash flows — is a financial statement that helps you analyze the cash flow of your business in a given time period. It tracks your beginning cash balance for every month, then tracks your inflows and outflows. You can find an example here. This type of report is a standard type of financial reporting that has a view of how you have performed in the past.

An important tool for a business owner to use is building a projected cash flow statement. It uses the same principal as the cash flow statement, but is more forward looking and can prepare you to manage the future growth of your business more effectively.

More information

We are committed to helping your business reach its potential. Our dedicated business banking professionals can help you find the right product to meet your business’ needs. To learn more, please call 1-800-428-7463, click here, or visit your nearest Citizens Bank branch.

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