General

Cash Flow In Business

Olumide Obanla Written by Olumide Obanla · 1 min read >

Cash Flow is the increase or decrease in the amount of money a business has. The term is used to describe the amount of cash that is generated or consumed in a given period. There are many types of cash flow, with various important uses for running a business and performing financial analysis.

Cash flows can either be positive or negative. It is calculated by subtracting the cash balance at the beginning of a period which is also known as the opening balance, from the cash balance at the end.
If the difference is positive, it means you have more cash at the end of a given period. If the difference is negative it means that you have less amount of cash at the end of a given period when compared with the opening balance at the starting of a period.

To analyse where the cash is coming from and going out, cash flow statements are prepared. It has three main categories – operating cash flow which includes day-to-day transactions, investing cash flow which includes transactions that are done for expansion purpose, and financing cash flow which include transactions relating to the amount of dividend paid out to stockholders.

For some businesses, like restaurants and some retailers, cash is really cash. The business takes cash from customers and sometimes pays its bills in cash. Cash businesses have a special issue with keeping track of cash flow, especially since they may not track income unless there are invoices or other paperwork. The best way to keep track of cash flow in your business is to run a cash flow report. This report shows the cash you received and the cash paid out to show your business’s cash position at the end of every month.

People often mistakenly believe that a cash flow statement will show the profitability of a business or project. Although closely related, cash flow and profitability are different. A cash flow statement lists cash inflows and cash outflows while the income statement lists income and expenses. A cash flow statement shows liquidity while an income statement shows profitability.

Many income items are also cash inflows. The sales of crops and livestock are usually both income and cash inflows. The timing is also usually the same as long as a check is received and deposited in your account at the time of the sale. Many expense items are also cash outflow items. The purchase of livestock feed is both an expense and a cash outflow item. The timing is also the same if a check is written at the time of purchase.

It’s clear that cash flow is crucial for companies of all sizes, but especially small businesses. Studies have shown that 82% of businesses that fail do so because they have cash flow issues. Make sure you’re not one of them by taking action with the right tools. 

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