Cash flow is the lifeblood of any small business, but not entirely for all the reasons you might think. Most new small business owners think that a good cash flow frees them up to purchase with more flexibility, and that’s true. However, the meaning of cash flow in business also deals with understanding how money is moving, and it also helps owners monitor the liquidity of their business. From covering unexpected expenses to reinvesting in your business, cash flow can be a huge boon to your success. With that in mind, we’re here to help you identify what is cash flow in business, how it works, and how to leverage it for optimal outcomes.
Types of Cash Flow in Business
When you define cash flow in business, you're looking at three different types - operating, investing, and financing cash flow and each type has a special role in the health of your company. Here's the breakdown for each:
Operating Cash Flow: When you're generating cash from your company's core business activities - this is called operating cash flow. This money includes revenue from sales and expenses such as payroll, rent, utilities, and supplies. If you consult with the best inventory financing loans and lenders, they’ll confirm that inventory is also considered operating cash flow and will show up on the operating section of your cash flow reports. Ultimately, if your business has ample funds to cover operational costs, you're working with a healthy level of operating cash flow.
Investing Cash Flow: These are funds spent or earned from buying or selling assets. For example, let's say you purchase a piece of equipment or real estate using these best cash flow loans and lenders. When you do, that purchase is considered your investing cash flow. Alternatively, selling these assets can also bring cash back into the business.
Financing Cash Flow: This type of cash flow reflects money coming in or going out due to borrowing, repaying loans, or issuing shares. This cash flow reveals how a business is funded. A positive financing cash flow can help a business expand, while negative cash flow in this area might indicate loan repayments or dividend payments to shareholders.
Why Cash Flow Matters
Now that we've more clearly addressed what is cash flow in business, let's consider why it matters. Sure, ample cash flow can help your business negotiate purchases, pay bills, etc. - but there's more to it than that. It also helps you and potential investors more clearly understand the health and viability of your business.
For instance, poor cash flow can lead to financial trouble if there isn’t enough money to cover regular expenses. Then again, positive cash flow allows a business to meet obligations like paying bills, meeting payroll, and paying suppliers on time, supporting smooth operations.
Cash flow is also important because it provides the ways and means for businesses to reinvest, grow their business, and hire new staff if needed. Additionally, cash flow acts as a safety net during emergencies, helping businesses respond quickly to unexpected costs. It also serves as peace of mind because even the tiniest setbacks can get ugly fast without a hearty flow on the books.
Cash Flow vs. Profit: Understanding the Difference
You might think that if you have awesome cash flow, then your small business should be profitable. While that makes sense, cash flow and profit don't mean the same thing. Let's drill it down:
Profit: This is the amount of money you have left over after all other expenses have been paid off and deducted from your revenue.
Cash Flow: It's the actual movement of money that flows in and out of your business.
Ultimately, your business might be profitable but struggle with cash flow. - especially if your funds are all tied up in inventory or long-term investments. Then again, your business might have great cash flow on paper, but if you're taking on debt or grappling to cover operating expenses - the cash flow is clearly in a bad crunch.
Seasonal Cash Flow Fluctuations
Seasons imply change, and certain seasonal shifts in your business can also change your cash flow. This is especially true in industries like retail, agriculture, or hospitality - it sees spikes and dips according to certain seasons. Peak seasons mean cash flow might surge, whereas down months experience the opposite in cash flow behavior.
So, how to manage cash flow in business with seasonal shifts? Do your best to plan ahead and prepare for seasonal transitions - especially if they're predictable. You can also set aside surplus cash during peak seasons and use it to cover expenses during the slow times.
How to Manage Cash Flow Effectively
Even more important than answering the age-old question of what is cash flow in business - learning how to manage it is even more vital for the best outcomes. Here are some key tips on managing and even how to increase cash flow in business:
Regular Cash Flow Forecasting: A cash flow forecast helps you predict your business’s future financial situation. When you analyze past trends and get a jump on future ups and downs in flow, you can more easily prepare for potential downtimes or shortages. Regular forecasting also helps in making better business decisions based on actual financial data.
Reduce Expenses Where Possible: Get clear on your business's wants and needs - that is to say, don't spend needlessly, and make it a habit of never overpaying. Start with negotiating supplier contracts for the best price, cut down on non-essential expenses, and find cheaper ways to operate your business without compromising on quality or safety. This management tip is also pivotal for increasing cash flow.
Improve Your Invoicing Process: Slow-paying customers can be devastating to any business's cash flow. Sometimes, it's unavoidable, but make sure your customers know your payment terms clearly. Be diligent in collecting on past due accounts, set up auto-reminders, and resist doing business with customers you know are prone to slow payments. You can also consider offering early payment discounts and other incentives to get a better handle on your invoicing process.
Use Cash Flow Management Tools: You know what they say - there's an app for that - even for small business cash flow. Check out apps like Cash Flow Frog or software like QuickBooks Online Cash Flow Tool to do the heavy lifting for you. These and other tools offer insights into your finances in real time. In turn, you can make informed decisions and identify potential cash flow issues before they become serious problems.
Cash Flow Challenges and Payroll Loans
Even businesses that carefully manage their cash flow can face unexpected shortfalls, particularly when payroll deadlines approach and the incoming revenue hasn't been received. This is where payroll loans can provide vital assistance. A payroll loan is designed to cover employee wages during cash flow gaps, ensuring that your workforce is paid on time, even when your cash flow is temporarily tight.
Short-term loans like this can offer fast access to funds, helping you avoid missing payroll and maintaining smooth operations. Payroll loans give businesses the flexibility to bridge cash flow gaps without tapping into reserves or other financial resources.
Final Thoughts
Cash flow is paramount to success, and we hope our answers to “What is cash flow in business?” have helped you master this intricate factor of your company's development. You can make sure your company stays solid by understanding these details and getting a deep understanding of your business cash flow behavior. From covering regular costs to supporting growth, we wish you every advantage in managing your small business cash flow.