Business cash flow is crucial to staying operational and afloat. If you're not sure what the cash flow meaning is and why it’s important, as well as why a cash flow statement is important, think about going without that cash. Knowing how to manage cash flow is how you keep your business healthy and vital so the revenue keeps coming.
What Is Cash Flow (CF)?
What does cash flow mean? The cash flow definition is a measurement of how much cash comes in but also flows out of your business within a specific amount of time. Positive cash flow is when more than enough money is coming in to pay your company's bills and obligations, but negative cash flow means there's not enough money coming to meet your obligations.
Cash Flow vs Revenue and Profit
Is cash flow the same as profit? It is not. Cash flow is a measure of money coming in and going out, so cash flow vs revenue is not the same thing. Neither is gross revenue vs cash flow. If your business takes out a loan, that can obviously increase your current cash flow available. However, that financing is more liability and not revenue.
Types of Cash Flow
What is business cash flow? There are several kinds of different cash flows you can look at. They include cash flow from operations, investing, and financing.
Cash Flow from Operations (CFO)
Cash flow from operations is typically revenue from your core business activities. CFO inflow would be product sales or account payments from clients, but CFO outflow would be overhead and bills.
Cash Flow from Investing (CFI)
Cash flow from investing usually revolves around trying to grow the business. CFI inflow might happen from selling off property or equipment, whereas CFI outflow would be investing in tools, inventory, and equipment.
Cash Flow from Financing (CFF)
Cash flow from financing involves money used to finance the business. CFF inflow might come from a loan or a credit card balance, while CFF outflow would be debt repayments.
Why Is Cash Flow Important?
It's pretty simple when you think about it. If your business doesn't have enough cash coming in, then you start having problems because you can’t pay for the things that make your business move.
How to Manage Cash Flow
Ideally, your cash flow analysis will show you how to manage your cash flow better.
Keep Up with the Bookkeeping
Simple bookkeeping will work wonders with your cash flow management. It might seem dull and tedious, but it matters substantially for the rest of these steps.
Create Cash Flow Statements
One cash flow statement is a snapshot of the time period it represents, but things will inevitably change. That's why you have to keep making new statements to spot trends and follow up with them.
Analyze the Cash Flow
Spotting trends is useful, but you also need to get down to how and why certain things are happening or not happening. It's only then that you can start effecting your own trends.
Boost or Slash Certain Things
Can you do anything to boost your cash flow? Can you cut spending anywhere? Look at your cash flow from both ends to make ends meet.
Repeat the Cycle
Statement analysis needs to be a recurring activity in the back office. The more times you do it, the better you will get at it.
How to Calculate Cash Flow
How is cash flow calculated? There are three different ways you can do it. The first is cash flow from operations, the second is free cash flow, and the third is cash flow forecast.
Cash Flow from Operations
Lenders often want to see this before they decide on approving financing for your business or not. This kind of cash flow is likely to take multiple factors into accounts, such as taxes, depreciation, operating income, and changes in working capital. These all add up.
Free Cash Flow
This method is simple and effective because you can pull all information from other financial reports. Subtract your capital expenditures from your operating cash flow and you will have your free cash flow. This number is usually quite accurate and gives you a good picture of what's going on.
Cash Flow Forecast
This one involves estimates. What is your projected cash coming in over a set period of time? What is your projected cash going out over the same time? The difference or sum is your ending cash flow. This number might be a little general, but it can still be insightful.
How to Increase Cash Flow
What is cash flow in business? If anything, it's something that you want to increase. Cash flow is the blood and oxygen that keeps the heart of your company beating, so more is definitely better. Fortunately, there are four techniques you can use to make sure your business always has enough cash on hand to keep things moving ahead.
Boost Your Revenue
Look for any way you can to just make more money. Raise prices if the market will absorb it. Boost the frequency of purchases from regular customers. Sell more of your services and products.
Reduce Your Expenses
Any chance you get to bring more money through your business is a great way to improve your company's cash flow. However, there's just as much value in mitigating your outbound cash. Hunt for any chance to reduce your overhead and monthly expenses.
You might not have much room for success with fixed expenses, including utilities, rent, and insurance. Then again, you might have some room to maneuver in different areas, such as contractors, bank fees, entertainment, and travel.
Expedite Payments
An occasional late payment might not be a big deal, but if it's a widespread or chronic issue, then your cash flow is going to suffer. You need to set very clear payment terms with your clients. Be sure clients know specifically when their payment is expected. Send out lots of reminders, and institute late fees for a final kick in the pants.
Have an Invoicing Strategy
Timing can be crucial to keeping your positive cash flow moving in the right direction. As such, you might want to get strategic in your thinking about when your money is coming in compared to when it has to go out.
What Is a Cash Flow Statement?
What does a cash flow statement show? Knowing how to do a cash flow statement is important, but so is understanding what it shows. Cash flow is nearly always connected to a specific cash flow statement. This will usually cover operating activities, financing activities, and investment activities.
How to Prepare Cash Flow Statement
Once you know the answer to “why is a statement of cash flow important?”, you need to know how to create a cash flow statement. You can do so in two different methods. One is known as the indirect method, and the other is the direct method. The indirect method is simpler and just means adjusting net income for money coming in and going out. The direct method involves detailing everything that matters, line by line.
How to Get Cash Flow Statements
In terms of getting cash flow statements, you have multiple options available to you.
Do It Yourself
A solo entrepreneur or small business might be able to do it the old-fashioned way with a pencil, paper, and a calculator. Do this for a basic snapshot.
Use Accounting Software
Accounting software certainly makes the process easier and faster. It might even be more accurate and efficient, especially if you can import digital financial records and skip the manual input.
Hire a Bookkeeper
If you want third-party professional help, then keep in mind that the experts at Lewis CPA can do your cash flow statements and help your business with cash flow management.
Conclusion
Why is a cash flow statement important? It helps you and others know how healthy your business is right now. To make sure everything is accurate, turn to the services of Lewis.CPA to prepare your CF statements. They can even help you manage your company's cash flow better. Just contact us!
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