Cash Flow is a measurement of the money that is moving (flowing) in and out of your business in a period of time. When it comes to small business, money is usually a good indicator of success. Even though money isn’t everything, it’s safe to say you’d like to take in more money than you put out. 

There are many uncertainties for small businesses during the current coronavirus pandemic. With that in mind, it can be much more difficult to measure success and revenue. In these times, it’s more important than ever for your small business to understand the concept of cash flow. Knowing how to manage and analyze cash flow is key for your small business to succeed. It sounds simple, but it’s a little more complicated than you might think.

What Does Cash Flow Mean for a Small Business?

Cash flow is the amount of cash, including paper money and digital funds, that moves in and out of your business. Funds can come in and go out through transactions and internal operations. Cash flow can be anything from paying employees to customers buying your service. If it involves money moving somewhere, it’s cash flow. 

Cash flow is described a few ways: 

  • Cash Inflow: Cash moves in through customers or clients who pay for your product or service. This can be through immediate transactions or accounts receivable, which is a debt owed to your business. 
  • Cash Outflow: Cash flows out through operating expenses like paying rent or mortgage of a storefront, loan payments, or buying inventory. It also includes taxes, payroll, and other internal operations.
  • Positive Cash Flow: When the inflow of cash outweighs the outflow, it’s considered a positive cash flow. This is the goal for most small business owners. It means you have enough cash to stay in business, but it also leads to opportunities to build savings, pay down debts, and reinvest in the business. 
  • Negative Cash Flow: On the other hand, a negative cash flow means you’re spending more money than you’re bringing in. Negative cash flow isn’t always a bad thing. For example, you might calculate it at a time where you’ve just paid bills before you receive money that’s owed to the company. However, it’s a bad sign if your business’s cash flow is consistently negative.

What is a Cash Flow Statement?

If you want to better understand where the funds flow in and out of your business, a cash flow statement can give a deeper look into cash assets and digital funds. This detailed report combines balance sheets and income statements.

For your small business, it’s important to track cash reserves and activities by calculating a cash flow statement (interlink to upcoming “how to calculate cash flow”) to keep on track as you grow. It can be done bi-annually, quarterly, or however often makes sense for you. It’s a good idea for business owners to look at their cash flow often to make the process as painless as possible.

While it may seem like an annoying chore at times, checking finances often and staying organized can make it a lot easier in the long run. The best way to keep this task simple is to work with a digital bank specifically designed for small businesses. NorthOne’s mobile app features cash flow reporting insights and allows you to integrate your bookkeeping tools with your account. This helps to avoid messy folders, the chance for lost papers, or related information hiding in different locations.

Components of a Cash Flow Statement

Analyzing your business’s cash flow through a cash flow statement, or statement of cash flows is an essential part of financial reporting and can give a picture of your business’s financial health. A cash flow statement sheds light on how well your business manages its assets and can identify areas for improvement. The statement shows changes in balance sheet accounts and income, and how those affect cash and cash-equivalents. It can help you see cash flow problems early, and make sure you’ll have enough cash to stay in business.

The statement is broken down into three areas of cash flow: operating cash flow, investing cash flow, and financing cash flow. In the statement, the cash flows are compared month over month, quarter over quarter, or however often you document your cash flow. The results are compared to your company’s net income, which can tell you more about the quality of earnings in a given period of time.

Operating Cash Flow

Operating cash flow is the first section of a cash flow statement. It’s mostly made up of the regular activities of a business that generate revenue, not including investment revenue. Operating cash flow can tell you how successful your business is at its core business activity.

Investing Cash Flow

Investing cash flow refers to the funds generated or spent from investment-related activities. This includes the sale or purchase of physical assets or securities. Examples of investing cash flow are equipment, property, or other developmental activities. This section can sometimes show negative cash flow in the short-term, but that can be a result of investing in the long-term success of your business.

Financing Cash Flow

Financing activity in a cash flow statement includes flows of cash that are specifically used to fund the operation of the business. Examples of financing cash flow include selling or issuing stock and cash from issuing debts. It can also include cash received from employees who use company stock options.

Why do Small Businesses Need to Understand Cash Flow?

Simply put, cash flow sets the groundwork of an operational business. The movement of cash in and out of your business indicates that parts are moving to make it work. That can mean buying raw material, paying rent, or customers and clients paying for your product or service. 

This also translates directly into cash flow liquidity, which is your business’s ability to repay debts with generated cash. Some lenders will even offer lending options with projected cash flow in mind, so long as it’s trending in a positive direction. Potential investors may also look at these documents when deciding whether to invest in your business.

Cash flow is a clear indicator of how well your business manages money and how well it’s performing overall. By giving a closer look at individual transactions, it can also show where you have room for growth, opportunities for spending or investing, and places where you may want to cut back or get more efficient (say, through better inventory management).

Cash flow analysis can inform your strategies for budgeting and potentially help you see financial challenges ahead of time. Making these informed decisions can benefit a business over time, ultimately leading to positive cash flow that can be maximized in the long-term.

Tips to Increase Cash Flow For Your Small Business

As a business owner, you’ll face your fair share of challenges, and cash flow may be one of them. Even though it can be complicated, you don’t have to let your business suffer because of it. There are ways to relieve some of your cash flow stresses.

First, look at the areas you may be over-spending, like bad marketing placements or overpriced office space. Investing in accounting can help identify opportunities for cutting back on some unnecessary expenses. If you think you’re doing all you can as a business owner to keep outflow low, consider applying for a short term loan designed to cover unexpected costs or help expand in a time of need. Especially in times like this, it can help you get back on your feet so you can get back to doing what you do best.