Cash Flow - How It Works to Keep Your Business Afloat

Cash Flow for Businesses
Cash Flow for Businesses. Don Nichols/Getty Images

What is Cash Flow?

Cash flow is the money that is moving (flowing) in and out of your business in a month. Although it does seem sometimes that cash flow only goes one way - out of the business - it does flow both ways. 

Here is how cash flow works:

  • Cash is coming in from customers or clients who are buying your products or services. If customers don't pay at time of purchase, some of your cash flow is coming from collections of accounts receivable.
     
  • Cash is going out of your business in the form of payments for expenses, like rent or a mortgage, in monthly loan payments, and in payments for taxes and other accounts payable.

Think of 'cash flow' as a picture of your business checking account. If more money is coming in than is going out, you are in a "positive cash flow" situation and you have enough to pay your bills. If more cash is going out than coming in, you are in danger of being overdrawn, and you will need to find money to cover your overdrafts. This is why new businesses typically need working capital, in the form of a loan or line of credit, to cover shortages in cash flow.

Cash Flow When Starting a Business

Dealing with cash flow issues is most difficult when you are starting a business. You have many expenses and money is going out fast. And you may have no sales or customers who are paying you. You will need some other temporary sources of cash, like through a temporary line of credit, to get you going and on to a positive cash flow situation.

 

Cash Flow in Seasonal Businesses

Cash flow is particularly important for seasonal businesses - those that have a large fluctuation of business at different times of the year, like holiday businesses and summer businesses. Managing cash flow in this type of business is tricky, but it can be done, with diligence.

 

How to Analyze Cash Flow

The best way to keep track of cash flow in your business is to run a cash flow report.

A cash flow statement looks at the change to cash (in this case, your business checking account), from different business activities and increases or decreases in other accounts on the business balance sheet. 

For example:

  • What happens to cash if a customer pays a bill? 
  • What happens to cash if your business purchases supplies?
  • What happens to cash if you buy a computer? 
  • What happens to cash if you pay an employee or independent contractor? 

At times, you may need to keep track of cash flow on a weekly, maybe even a daily basis. 

Susan Ward, at Small Business Information-Canada, suggests: 

 A quick and easy way to perform a cash flow analysis is to compare the total unpaid purchases to the total sales due at the end of each month. If the total unpaid purchases are greater than the total sales due, you'll need to spend more cash than you receive in the next month, indicating a potential cash flow problem.

Your accounting software should have a cash flow statement as one of the standard reports, or your accountant can run it for you.  

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