What is cashflow? And why is it important?

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40% of small business fail within their first five years, according to research by business insights provider Ormsby Street. That’s a sobering statistic for any business owner, and one of the biggest causes of these failures is a lack of liquid cash in the business.

Cash is very much king, and when you don’t have access to ready cash, this can lead to unpaid supplier bills, late salary payments for staff and, ultimately, the inability to continue trading.

This lack of cash in the business can be due to a multitude of reasons, including slow payment of invoices, badly managed spending in the company and a poor overview of the company’s overall ability to generate revenues. And it’s worth noting that even businesses that are profitable and growing can suffer the negative impact of poor cashflow

So how do you keep a close eye on your cash, and become more proactive about ensuring you have the liquid money needed to trade, expand and get beyond those first five years?

The answer is to understand your cashflow. We’ve pulled together the key things you need to know about cashflow management and generating positive cashflow.

Cashflow 101: What is cashflow?

Cashflow is the process of balancing the cash inflows and cash outflows in your business, and ensuring that incoming cash receipts are greater than outgoing expenditure.

If cash is the lifeblood of your business, cashflow management is the process of keeping the business’s heart beating in the most healthy way. It’s about making sure that more cash flows in than flows out. That sounds simple, at first, but cashflow is not a static number and must be tracked and monitored as an ongoing and fluctuating process in the business.

During the course of a working week, cash will flow in and out in various ways

  • Cash inflows – these include income from physical sales, online shopping, repayments of loans to directors or any non-sales income streams you have as a business.
  • Cash outflows – these include your cost of sales, utilities overheads, paying your staff and suppliers and making payments for any loans, financing or subscription services.

Good cashflow should not to be confused with profit, which is the surplus you’re left with at the end of the period, or with ‘having money in the bank’. Checking that your bank account is still in the black is not cashflow management, it’s living on a wing and a prayer – and that’s a recipe for a rocky ride if you’re in the early stages of your business journey.

How is cashflow measured?

Cloud accounting software records the transactions that take place in your business, and this data becomes the foundation for your cashflow reports.

Whether your accounting data is manually keyed in, pulled through from an integrated point-of-sale cash register or input automatically by smart bookkeeping apps, the end result is a pool of financial data – data that tells a story about the cash in your business.

What you’re interested in is the cash inflows and outflows across the period in question, so you can see as clearly as possible where you’ve generated cash for the business, and where you’ve expended cash through areas like your cost of sales, utilities overheads or paying your staff.

This cash information is gathered together in a cashflow statement, showing your operating, investment and financing cashflows. By breaking down these inflows and outflows into their key transactions, you get the best possible understanding of your cashflow position as it currently stands.

What businesses are most affected by cashflow issues?

Some types of business have an especial need to stay on top of cashflow – generally, those sectors where there’s a large cost element and small profit margin in delivering the product or service in question, such as retail, manufacturing, catering or construction.

A fashion retail business will experience seasonality, for example, that needs to be taken into account when planning out the company’s finances across the year.

Cashflow dips may become an issue where:

  • The working capital cycle is high – or in other words, the time it takes to turn the company’s net current assets and current liabilities into cash is slow.
  • There’s debt in the business – for example, that invoice financing has been used and there are repayments to make out of the company’s current cash reserves.
  • Margins are tight – and the costs of buying in materials and supplies may fluctuate, knocking down the overall profit margin on each product/service.
  • If the business is growing fast – and cash in the business is being assigned to expansion plans, rather than funding the day-to-day trading of the business.

With so many areas where poor cashflow can have an impact, it’s vital for businesses in these sectors to have a watertight grip on cash – and that’s where cashflow solutions can bring considerable value to cash-poor industries.

Positive cashflow and the power of forecasting

For your business to succeed and grow, its essential to achieve a positive cashflow position.

In the most basic terms, this means ensuring that your cash inflows are greater than your cash outflows. And this careful management of your cash position becomes far easier when you have cashflow forecasts to help you.

A cashflow forecast goes beyond the here and now to give you a view of your cash position in forthcoming periods – in essence, it helps you see into the future of your cash.  

When you can see further down the business road, it’s possible to predict the previously mentioned dips in cashflow. And armed with this information, your business can take proactive action to increase cash inflows and decrease outflows. By regularly reviewing your cashflow statement and forecasts, you have the information needed to balance the inflows and outflows and attain that holy grail of ‘positive cashflow’

A modern cashflow solution, such as Fluidly, gives you a smart overview of your incoming cash, aged debts and future cashflow – making it easier than ever to control your cashflow position.

Find out how Fluidly puts you in the cashflow driving seat