Cashflow

Grasping cash flow is a game-changer for running a successful business. Let’s break down what cashflow is and why it matters in financial analysis.

What’s Cash Flow?

Cash flow is all about the money moving in and out of your business. Think of it like your bank account balance at any given time. If more money is coming in than going out, you’ve got positive cash flow. That’s a good sign—it means you can pay your bills and keep things running smoothly. On the flip side, if more money is going out than coming in, you’ve got negative cash flow, which can spell trouble if it keeps up.

You’ll find cash flow details in the cash flow statement. This handy document shows where your money came from and where it went over a certain period. It’s like a financial diary for your business.

Why Bother with Cash Flow Analysis?

Keeping an eye on cash flow is crucial for a bunch of reasons:

Keeping the Lights On: You need enough cash to pay your suppliers, employees, and other bills.
Smart Investments: Helps you decide if you can afford new equipment or other big expenses.
Financial Check-Up: Gives you a snapshot of your business’s financial health, so you can spot problems early.
Getting Loans: Lenders and investors look at your cash flow to see if you’re a safe bet.
Planning Ahead: Helps you predict future cash needs and plan for growth.

What You’re Looking At	Why It Matters
Keeping the Lights On	Ensures you can pay your short-term bills
Smart Investments	Helps you decide on new investments and big purchases
Financial Check-Up	Gives insight into your business’s overall health
Getting Loans	Shows lenders and investors you can pay back loans and attract investments
Planning Ahead	Helps you forecast future cash needs and plan for growth

Cash flow is the net amount of money moving in and out of your business. It’s all about balancing the money you make from sales and investments with what you spend on expenses and debt.

By regularly checking your cash flow, you can keep your finances in check, run your business more efficiently, and plan for a bright future.

Components of Cash Flow Statement

The cash flow statement is like the heartbeat of a business, showing where the money’s coming from and where it’s going. It’s split into three main parts: operating activities, investing activities, and financing activities.

Operating Activities

Operating activities cash flow (CFO) is all about the day-to-day stuff. It starts with net income and adjusts for things that don’t actually involve cash, giving a real picture of the cash generated or used by the business’s regular operations. This part is crucial because it shows how much cash is coming in from what the company sells or does.

Item	Amount (£)
Net Income	50,000
Depreciation	5,000
Changes in Working Capital	10,000
Net Cash from Operating Activities	65,000

Investing Activities

Investing activities cash flow (CFI) covers buying and selling long-term stuff like equipment and investments. This section shows gains and losses from investments, spending on equipment, and other big purchases, giving a peek into the company’s investment plans and growth potential.

Item	Amount (£)
Purchase of Equipment	(20,000)
Sale of Investments	15,000
Net Cash from Investing Activities	(5,000)

Financing Activities

Financing activities cash flow (CFF) deals with how the company gets and uses money from owners and creditors. This includes issuing shares, repaying loans, and paying dividends. It shows the cash flow from financing the company’s operations.

Item	Amount (£)
Issuance of Shares	30,000
Repayment of Loans	(10,000)
Dividends Paid	(5,000)
Net Cash from Financing Activities	15,000

Knowing these parts helps in understanding the overall cash flow of a business, giving a full view of its financial health and how well it’s managing its money. Each part is key to seeing the company’s cash management strategies in action.

Keeping Your Cash Flow in Check

Managing cash flow is like keeping your business’s heart beating. Without it, things can go south pretty quickly. You need enough cash to pay bills, keep the lights on, and maybe even grow a bit. Let’s talk about some easy ways to keep that cash flowing and why looking ahead is so important.

Simple Tricks to Boost Cash Flow

Here are a few tricks to keep your cashflow healthy:

Lease, Don’t Buy: Especially if you’re just starting out, leasing stuff instead of buying it can save you a ton of cash. You get to use what you need without shelling out a big chunk of money upfront. Think of it like renting an apartment instead of buying a house.
Smart Inventory Moves: Got stuff sitting on the shelves collecting dust? Time to clear it out. By getting rid of products that aren’t selling, you save on storage and other costs. Plus, it frees up cash for things that actually make you money.
High-Interest Savings: Park your extra cash in a high-interest savings account. It’s like putting your money to work while you sleep. You’ll earn more interest compared to a regular savings account.
Early Bird Discounts: Offer your customers a little discount if they pay their bills early. It’s a win-win: they save a bit, and you get your cash sooner.

Trick	Why It Works
Lease, Don’t Buy	Keeps more cash in your pocket
Smart Inventory Moves	Cuts down on storage costs
High-Interest Savings	Earns you more money
Early Bird Discounts	Speeds up cash inflow

Peeking into the Future: Cash Flow Forecasting

Forecasting your cash flow is like having a crystal ball for your business. It helps you see if you’ll have enough money to cover your bills in the coming months. Here’s how to do it:

Guess Your Income: Estimate how much money you’ll bring in from sales and other sources.
Guess Your Expenses: Estimate how much you’ll spend on bills, supplies, and other costs.
Keep an Eye on Things: Regularly check your forecast and tweak it as needed.

Month	Estimated Income	Estimated Expenses	Net Cash Flow
January	£10,000	£8,000	£2,000
February	£12,000	£9,000	£3,000
March	£11,000	£10,000	£1,000

By using these simple tricks and keeping an eye on your cash flow forecast, you can make sure your business stays in good shape.

Cash Flow vs. Profit

What’s the Difference?

Knowing the difference between cash flow and profit is like knowing the difference between your wallet and your bank account. Both are crucial for understanding a business’s financial health, but they tell you different things.

Cash Flow

Cash flow is all about the money moving in and out of a company. Think of it as the lifeblood of your business, keeping everything running smoothly. This info is found in the cash flow statement, which breaks down how cash was used or received over a specific period.

Key parts of cashflow:

Operating Activities: Cash from your main business activities.
Investing Activities: Cash spent on or received from buying or selling assets.
Financing Activities: Cash from loans, investors, or paying off debts.

Cash Flow Components	Description
Operating Activities	Day-to-day business activities that generate revenue.
Investing Activities	Buying or selling long-term assets.
Financing Activities	Changes in loans and equity.

Profit

Profit, or net income, is what’s left after you subtract all your expenses from your total revenue. This number shows up in the income statement and gives you a snapshot of how well your business is doing over a certain period.

Key parts of profit:

Revenue: Total earnings from sales or services.
Expenses: Costs incurred to earn that revenue.
Gains and Losses: Extra income or losses from things like selling assets.

Profit Components	Description
Revenue	Income from primary business activities.
Expenses	Costs to generate revenue.
Gains and Losses	Income or expenses from non-core activities.

Why Both Matter

Both cash flow and profit are essential for understanding a company’s financial health. They give you different angles on how the business is doing.

Cash Flow: Shows liquidity—how easily the company can pay its bills and invest in growth. Positive cashflow means the business can meet short-term obligations and seize opportunities without needing extra financing.
Profit: Shows how efficiently the company is generating earnings compared to its expenses. A profitable business is usually well-managed and efficient, but profit alone doesn’t guarantee liquidity.

Metric	Significance
Cash Flow	Measures liquidity and operational sustainability.
Profit	Indicates overall financial performance and efficiency.

Understanding both metrics is crucial for everyone involved with the business—investors, owners, employees, and entrepreneurs. For example, a company might be profitable but still struggle with liquidity if its cash inflows are delayed. On the flip side, a business could have strong cash flow but be unprofitable if its expenses always exceed its revenues. You need to look at both to get the full picture of a company’s financial health.

For a detailed approach to analyzing cashflows, check out our blog on Cash flow Analytics

Johnny Meagher

5 min read