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What is Cash Flow?

Simply put, Cash Flow is the in and out movement of money in your business. There is a common misconception that Cash Flow is only the movement of money into the business, however, the Cash Flow is based on the movement both in and out of cash. Therefore, the Cash Flow of a business is based upon the money that it receives from customers or clients who acquire the business’ services or products. This is then weighed against your business’ outgoing expenses such as rent or mortgages as well as taxes.

Your Cash Flow can be defined by whether there is more money going into your business than out, ie a Positive Cash Flow. However, the opposite to this can occur when your outgoings result to more than your incomings, ie A Negative Cash Flow.

Why is Cash Flow Important?

A business’ Cash Flow is extremely important, and the failure of small business is often reported to be due to a lack of cash and negative Cash Flow. Having a strong, positive Cash Flow is important, as it puts you in a great position when buying. Having adequate cash reserves allows you to avoid borrowing money and in doing so, avoid loans and foreclosures. Furthermore, when investing for your business, you are basically using your future Cash Flow to fund your purchases. As such, it is hugely important to operate with a positive Cash Flow to ensure that you can pay your debt commitments.

Without a positive Cash Flow, it is often extremely difficult for business to grow. A strong Cash Flow provides your business with the security it needs to then go and invest in its growth. These cash reserves can be used to invest for your business in a way which will help it to grow. As such, a positive Cash Flow is absolutely integral to the growth of a small business.

How do Cash Flow Statements work?

A Cash Flow statement is used to document and detail these incomings and outgoings of cash into a business. This allows a business to keep a firm track of its Cash Flow, whether it be positive or negative. As such, the Cash Flow statement is an essential part of any business’ financial statement. A Cash Flow statement allows a business to analyse where exactly it’s cash is coming from and where it is going. This allows the business to make incredibly important financial decisions to either maintain and grow a positive Cash Flow, or find and rectify the problems behind a negative Cash Flow.