What is Cash Flow?

boat what is cash flow

You worry sometimes about whether you have enough cash in the bank to cover an upcoming expense. You know you can cover this week or this month, but you want to know if your cash balance in the future will become an issue. At what point will you run out of cash? These concerns are related to your cash flow. 

Getting a grasp on the basics of cash flow is the first step toward taking control of your cash and feeling secure in your cash position.

Understanding cash flow

river what is cash flow

Cash flow is the cycle of the cash going in and out of your business. Cash flow is like a river. Water flows into a river from its source and flows out at the mouth. If the water flowing into a river is more than the water that is flowing out, then the river level rises. If the opposite happens, the river level falls. With your cash flow, of course, the goal is that your cash levels rise steadily and the “river” never runs dry.

The cash flowing into your business can be different than your revenue.  Some customers may wait to pay you so your cash is tied up in your accounts receivable or customers may send you prepayments. 

Cash can also come into the business from a variety of sources not related to revenue, such as:

  • Return of a deposit 
  • Proceeds from a loan 
  • Cashback incentives from the use of credit cards

Similarly, cash flows out of the business when you pay your expenses. However you may also have cash going out of your business for things that are not expenses. For example:

  • Payments on loans
  • Distributions to owners
  • Other non-expense related expenditures

Why should I care about cash flow?

Have you ever been in the situation where your profit and loss statement (or income statement) showed that you made a profit but when then you looked at the funds  in your bank account you  wondered, “where did the profit go?” The answer many times can be found when you look at your cash flow.  Somewhere along the way, cash left your business. Understanding your cash flow is the first step in solving the mystery and making adjustments if needed. 

When you have a cash flow forecast, it can actually help you alleviate some of your fears and can help you to face the future with confidence. 

Cash flow is one of the keys to making good decisions in your business. You need to know what your cash flow situation is in order to assess if your business can afford to absorb expenses. It will help you answer questions such as:

  • Can you afford to hire a new employee?
  • Can you afford to give bonuses?
  • Can you afford to purchase new equipment? 

When COVID-19 hit, it caught many of us off guard. Some businesses had to shut down entirely for weeks or longer. Suddenly the issue of cash flow became even more critical. The questions on every business owner’s mind were: 

  • When will my business run out of money? 
  • Will a PPP loan help my cash position?
  • Do I have enough cash to survive this situation? 
  • What if this situation lasts six months or a year? 

There was (and still is) a lot of panic around how long this situation will last and how it will affect businesses and our lives. But when you have a cash flow forecast, it can actually help you alleviate some of your fears and can help you to face the future with confidence. 

We have been working with many of our clients to help them to understand not only what their cash position is now, but also to help them with projections as to what their cash will look like in the foreseeable future.  Would you like to improve your understanding of your cash flow? If so, reach out to us to find out more about how we can help you.