What is cash flow in business?

Understanding business cash flow

The simple definition of cash flow is the money flowing in and out of a business. Incoming cash flow consists of payments from customers, clients, or other forms of revenue and income. Outgoing cash flow consists of expenses such as payroll, utilities, and rent/lease, for example.

The more you understand cash flow, the likelier you are to routinely have enough of this vital resource to maintain company financial health. That’s why cash flow management — monitoring cash inflows and outflows to ensure you have enough cash to cover current and upcoming expenses — is so important for business owners.

This article explains how to understand business cash flow and successfully manage it to maintain company health and momentum.

Business cash flow: an overview

Your company’s cash flow status refers to how well-positioned your company is to meet its financial commitments. Positive cash flow is when a company has sufficient money coming in to cover its expenses and a buffer for unexpected financial commitments or opportunities. Negative cash flow is the opposite, a situation in which a business has more expenses than its incoming cash can cover.

The characteristics below reveal some signs of both positive and negative cash flow.

The status of your cash flow is essential to understand, but it may not be an indicator of overall company health, because it does not calculate profitability or net income. For example, a thriving company can have negative cash flow even if the business is sound because cash inflow timing is slow. Conversely, a company with positive cash flow may not be profitable when it is done paying its bills.

Many factors can lead to cash flow challenges, including:

• Slow-paying clients.
• Delays in company billing.
• Lack of cash flow management to anticipate cash crunches.
• Failure to time payments to maximize how long you hold on to cash.
• Slow sales.
• Too much inventory on hand.
• Unexpected expenses.

Even successful companies can, and do, face cash flow crunches. A cash flow shortage can hurt your credit, damage your relationships with vendors and staff, affect your ability to gain financing, or otherwise negatively impact your business. When you understand and manage company cash flow, you gain insight into what is driving positive and negative cash flow.

Types of cash flow

There are three types of cash flow: operating, investing, and financing. Understanding these can help you to tap all available resources to maintain positive cash flow.

• Operating cash flow is what your company generates through its operations as a business.
• Investing cash flow is cash from investments your business has made in assets such as property, equipment, machinery, securities, CDs, or other items that generate cash for your company.
• Financing cash flow is the cash income your company gets from loans and financing.

How to manage your cash flow

When you manage cash flow, you track the inflow and outflow of cash to identify delays of cash coming in, excess amounts of cash going out, or upcoming financial needs for which you will not have enough funds. This monitoring provides advance knowledge and time to take action before a cash flow crunch occurs.

Two financial statements are useful for monitoring cash flow to get ahead of any cash flow problems.

1) A cash flow statement reflects a beginning cash balance, inflows, and outflows for a specific period.

2) A cash flow projection estimates cash flow for the future. This is also often referred to as a cash flow forecast.

Understanding a cash flow statement

A cash flow statement tracks cash inflows and outflows over a certain period and reveals what cash is coming in, from where, and how well-equipped a company is to pay its bills and manage other financial obligations. The insight from a cash flow statement can reveal important information in time for you to take action, for example:

• Impending cash shortages.
• Which of your customers is slow to pay/not paying.
• Which expenses are high or on the rise.
• Changes in inventory costs.
• Payroll fluctuations.
• Impending expenses.

A cash flow statement can be created monthly, quarterly, or annually. Calculating the net cash flows for each category can reveal changes in cash flow that are important to understand. The type of accounting you use, the kind of business you run, and other factors may impact how you categorize cash in your cash flow statement, so check with your advisers to create this important document.

Understanding a cash flow projection

Assessing how much cash you have currently is an important first step, but it's also essential to anticipate the amount of cash you'll have — and need — in the future. Projecting your cash flow to understand your potential future cash flow status helps you plan confidently and make informed decisions.

A cash flow projection provides a view of what issues or opportunities are ahead and what actions you should take, for example:

• Do you need to speed up collections or contact slow-paying customers to increase cash flow?
• Do you need to explore new vendors with better pricing or service?
• Is your operating cash flow sufficient to cover expenses?
• Will you need additional funding sources, from financing cash flow, to cover business expenses or opportunities?
• Do you need to increase sales?

A cash flow projection is typically created for one year and may include the following elements:

• An estimate of future sales and the costs associated with those sales.
• Payroll costs.
• Typical payment timing.
• Fixed expenses (e.g., rent, loans, insurance, utilities).
• Variable expenses (e.g., shipping, hourly staff costs, inventory).

How to increase your cash flow

As you learn more about cash flow and the importance of managing it, you may wonder how you can positively impact your cash flow. The answer is to increase your company’s cash flow and to boost your company’s skills at managing its cash flow.

Consider these six potential ways to increase your cash flow:

1. Sell more goods or services that are paid for at the time of service or sale. Delays in customer payments strain cash flow. Collecting at the time of service can remove this problem.
2. Reduce expenses. Once you recognize that company outflows are high, you can renegotiate or change vendors and seek better pricing on other expenses.
3. Time expense payments to maximize how long you hold on to company cash.
4. Accelerate collection of accounts receivables by offering discounts for faster payment or by accepting 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.

Find the right cash management tools

The right tools can help you monitor, manage, and speed up, your cash flow so that you can make informed decisions. Tools that can help you manage cash include:

A cash flow forecasting tool to ease the job of managing cash. When you automate the process of monitoring and forecasting, you have an easier and more accurate accounting of your cash flow. Consider tools that can:

• Forecast cash flow up to 12 months out.
• Include personalized, actionable advice.
• Show you how your business compares to similar companies.

Tools to simplify company expense payments. Making it easier and quicker to pay your bills means you can more easily time payments and spend less time making payments. Consider:

• Real-time payments (RTP).
• Domestic and international wire transfers.
• ACH payments.

Payment tools to get paid faster by clients and customers. When you speed up the time it takes customers and clients to pay, your business will have cash flowing in more quickly to help you pay bills and meet obligations. Tools can help you:

• Create online, customized invoices.
• Accept credit cards.
• Track and categorize payments.
• See what’s due and send automated email reminders.
• Use peer-to-peer payments (P2P) from customers, through Zelle®¹.

Financing to ease cash-tight times. Many thriving companies lean on business financing to get through cash flow crunches. Financing means you can pay your bills and avoid the negative potential impact of a cash crunch. Consider:

• A line of credit (LOC).
• A loan.

Cash Flow FAQs

What is the difference between cash flow vs. profit?

Cash flow is the tracking of the cash coming in and cash going out of a company during a certain period. Profit is the money your business has left after it pays all of its expenses and meets its other financial obligations. Cash flow indicates a business’s ability to meet its obligations during a certain period, while profit is a measure of whether a company is ultimately earning money and is successful.

What is the difference between cash flow and revenue?

Cash flow shows you the cash inflows and outflows (revenue and expenses) during a given period. Revenue is the money coming into your business and a measure of how well your company is doing with sales and marketing.

If I have cash flow problems, does that indicate problems with my company?

Most, if not all, businesses have cash flow issues at some point. Tracking your cash flow helps you to see where issues exist with cash coming and going out of your business so that you can make sure you have sufficient cash to meet your obligations. These adjustments could mean increasing your sales efforts, prompting slow-paying clients to pay, speeding up your billing, or tapping into financing.

Is it really worth my time to manage my cash flow?

Cash flow issues can significantly and negatively impact your business even if your company is thriving. A successful company experiencing a cash flow crisis can lose important vendors due to late payments, hurt its reputation if operations suffer, or even go out of business. Knowing your cash flow status lets you make plans to avoid a cash flow crisis and make adjustments in your business to avoid crunches in the future.

Can financing help with cash flow?

Many businesses face cash flow issues at one time or another. An LOC or other financing can provide the support you need to weather a cash flow issue in tight times. A line of credit can be used for many types of expenses, and only when you need it. Your business can pay back the funds when you no longer need them, until next time. You only pay interest on the funds you use.

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's needs. To learn more, please call 1-800-428-7463, click here, or visit your nearest Citizens branch.