What Is Cash Flow? Useful Guide For Business Owners


Cash flow is the movement of money in and out of your business and your business bank account.

Think of cash flow like your car’s gas tank. You fill up the tank with gas, and it empties as you drive. The goal, however, is to have enough gas in your tank, so you never run on empty.

What is Cash Flow?

A company’s cash flow is the sum of its net cash inflow and outflow over a given period.

A positive cash flow must be maintained for a firm to continue operating. Positive cash flows are also necessary to provide value for investors. Investors are looking for good cash flows even after capital expenditure payments have been paid (known as free cash flow).

A month, quarter, or year is the conventional reporting period over which money flow is monitored.

How to Analyze Cash Flows

One can learn more about problems relating to a company’s cash flows by using data from the statement of cash flows and other financial documents.

The following ratios assess the sufficiency of cash flows by combining income statement and balance sheet data.

Return on Cash Flow from Sales

Different accruals may distort the reported results to the extent that the net profit ratio does not accurately reflect the amount of profit from each dollar of sales when a business uses the accrual basis of accounting to record its performance.

Consider employing the money flow return on sales in place of cash flows if there is a discrepancy between them. This strategy emphasizes the amount of money made from each dollar of sales, which gives a more accurate picture of a company’s performance.

We must first approximate the money flows from the net income number by adding non-cash expenses divided by net sales for the measurement period to arrive at the money flow return on sales.

The equation is: (Net profit + Non-cash expenses) / Total net sales

Cash Flow Return on Assets

It makes sense to determine the money flow created by assets in an asset-intensive industry to assess how productive the significant asset investment is.

When connected to a performance assessment system, the likelihood of a continuous decline in the number of fixed assets and inventories about sales is high.

To determine the money flow return on sales, we must first approximate the cash flows from the net income figure by adding non-cash expenses and dividing by the total assets as of the measurement period’s end.

The equation is: Net profit + Non-cash expenses / Total Assets

The ratio of Cash Flow from Operations

A company’s core activity should produce the majority of its money flow. Ancillary financial flows ought to be relatively insignificant. Without those, the entity must rely on non-core activities to fund its core activities.

The derivation of money flow from operations, which excludes non-cash revenues and non-cash expenses, is necessary to calculate this ratio. Deferred revenue, such as an advance payment on services that will be rendered over several months that is being recognized over time, is an illustration of non-cash revenue.

After calculating money flow from activities, we divide it by the entity’s real net income.

The math is as follows: Cash flow from operations / Net income

What happens if your cash flow isn’t under control?

Failure to effectively manage and monitor your money flow puts your company at risk and may result in several issues. Here are a few of the major problems you might experience:

  • A surplus of stock. It can be tempting to place large orders for materials to meet abrupt spikes in demand for a product. However, if the demand changes, you can be left with excessive stock and possibly even debt from the materials you ordered. If you order too much inventory, you risk being stuck with difficult-to-sell materials that grow outdated.
  • They have protracted payment terms. Long payment terms can frequently result in extended periods of no revenue. The lack of cash while you wait for the money to arrive can make any unforeseen problems, such as a fire at the office or repairing a laptop, problematic. Bad debt is another scenario that occurs when clients do not pay.
  • When you land a new customer, it might be pretty tempting to go on a spending binge and buy everything from luxury orthopedic chairs to an office ping pong table. But remember that you don’t have the money until they pay you. The best action is never to spend money you do not have.
  • It’s simple to get carried away with your business view after securing a large order, much like with stock. Hiring more employees or opening up more sites to expand your business could seem like a good idea, but you need the money to support these decisions.

While your revenues may fluctuate, your rent and salary won’t, so if you want to expand your staff and facilities, you’ll need to be prepared to bear temporary pressure on your finances.

Tips for cash flow management

Managing money flow for your small business is a constant learning process. Here are four tips to help you get started (and avoid searching your couch cushions when you realize you’re out of money):

  • Try doing it yourself: If you know your running costs and revenue, calculating cash flow is not too difficult. Choose the period for your calculation first. Subtract the business budget running costs for that period from the same-time revenue. Your money flow is that.
  • Maintain cash reserves: As a business owner, it’s not your job to anticipate every speed bump on your journey. However, it is beneficial to maintain a rainy-day fund to cover any losses you sustain. When business is slow, having funds for a month or two of costs will assist you in avoiding falling behind.
  • Try it yourself: Calculating money flow is relatively straightforward if you know your running costs and revenue. Determine the time for which you want to calculate first. Subtract the business’s operating costs for that time frame from its revenue for the same time frame. Your money flow is as shown.
  • Keep some cash on hand: As a business owner, it is not your responsibility to foresee every hiccup on the road. It does, however, help to have a rainy-day fund to cover any losses you incur. You can avoid falling behind when business is slow by having enough savings to cover a month or two of expenses.
  • Avoid late payments: If your company invoices clients, you are familiar with the frustration of persistently waiting for the price. Think about giving early-paying customers discounts and assessing late fees on those that pay beyond the due date. Additionally, you might change your contract with clients to make invoice due dates more certain. Investing in invoicing software will save you from difficult talks and nudge clients into payment.

Types of cash flow

Depending on who you ask, there are a few different sorts of money flow. Some people might mention operational, financing, and investing money flow. Some people might include net cash flow, past money flow, and future money flow. Cash flow “types” are measures in either case. Operating and free cash flow measures are the two main categories.

What is operating cash flow?

The cash generated by the company’s business operations is measured as operating money flow.

Business owners prefer it as a metric since it can let them know if they are bringing in enough money to cover their bills or running costs. To assess whether your company is long-term financially viable, investors are also interested in your operating money flow.

What is free cash flow?

A corporation’s cash from operations after deducting capital expenditures is free money flow. The terms “levered free cash flow” and “unlevered free cash flow” may be familiar to you. Consider a cake to comprehend the distinction better.

When fully ripe, unlevered money flow resembles a cake. It’s all the money the company has left over after all debts have been settled.

But after that, the company settles some obligations, covers operating costs, pays interest, etc. Each person cuts a piece of cake. That leaves levered free cash flow. After paying off its debts, a company’s money flow is what remains.

What causes cash flow problems?

Cash flow is a simple enough idea. But in practice, managing it in your firm can be challenging.

When business leaders don’t understand the distinction between earnings (sales) and money flow, cash flow issues might arise. Although it’s common to believe that higher sales are the key to a favorable money flow, that isn’t always the case.

Because income is inconsistent and expenses are ongoing, money flow is frequently a problem. With more or more extensive sales, the issue might be resolved. Cash flow issues, however, will reappear if those efforts are not long-lasting.

One of the easiest methods to improve money flow is by keeping your accounts receivable under control. Furthermore, there are several options for accelerating payment. It’s still not always straightforward, though.

Avoiding the accumulation of past-due receivables in the first place is the best strategy to reduce growing amounts of them. But more than that, preventing cash flow issues frequently boils down to awareness and making minor adjustments before little problems worsen. As a result, performing a money flow study is beneficial regardless of how well sales are progressing.


Any business owner should know what to look for and how to utilize that information to calculate their cash flow to maintain a healthy cash flow.

With that information under your belt, you’re prepared to monitor your cash flow carefully and stop your company from running out of money.

All the best to you!


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