At the beating heart of any business is cash flow, which is the flow of money running in and out of a business. It’s essentially the rate at which cash leaves the business, such as to pay staff, buy stock, or settle tax bills, and the rate at which it enters the business, such as through sales or investments. Cash flow, also known as working capital, is essential for any successful business, as, without it, the business will be cash-starved and deprived of fuel, which means business activity will be constrained.
Cash flow can be measured to gauge how well the business is faring at any given time, i.e., whether it’s in the red (danger zone), black (stable zone), or green (profit zone). While a business may be temporarily in the red, it’s vital to keep track of company cash flow to forecast if the business is likely to run into serious financial difficulty.
What is a cash flow statement?
A cash flow statement is a financial summary of the flow of cash running in and out of the business. It can be used to determine the business’s financial position at any given time, such as whether it’s overspending, underspending, or spending within its limits.
A cash flow statement categorises cash flow into three areas that include:
- Cash flow from operational activities: This is cash flow from operating the business, so money spent generating a sale and operating the business or money received from a sale.
- Cash flow from investment activities: This is cash received from investments, spent on investments, or lost to investments, such as a property or equipment purchase.
- Cash flow from financing activities: This is cash that is paid out or received by lenders, including cash contributed or extracted by the owner.
A cash flow statement can be used to measure business performance, along with the balance sheet and income statement.
What is positive cash flow?
Positive cash flow is when there’s more cash entering than leaving the business, which will likely mean that the business is in a stable financial position. A cash flow positive business is what most business owners aspire to achieve, as a profitable and cash-rich business has the resources to pursue more opportunities and provide a greater experience to employees and customers alike.
Positive cash flow is also key to growth, as to grow, a business needs to invest in its infrastructure, recruit more talent, and establish clear growth plans. A consistent flow of cash is required to sustain long-term growth and keep it on an upward trajectory.
What is negative cash flow?
Negative cash flow is when there’s more outgoing cash than incoming cash, which can be problematic for the business should it run into financial distress. A business with negative cash flow is a ticking time bomb, as once it runs out of cash, problems will ensue, such as pressure from creditors to make payment and subsequent court action if payment demands are ignored and no professional support is sought.
It’s natural for small businesses to experience short-term negative cash flow, although when it becomes apparent that it’s more than a teething problem, this is when company growth can significantly falter.
A business with consistently negative cash flow may turn to other avenues to top up on cash flow, such as a loan or business finance. A short-term boost of cash may help revive the business and get it back on track. If the business requires a long-term stream of cash, it may explore more long-term finance solutions or seek restructuring support to revisit the efficiency of the business.
Keep your finger on the pulse
Company cash flow is essential for the smooth sailing of any business, so if there’s a temporary shortfall of cash or a long period of slow growth, search for ways to mitigate the strain on the business, such as tightening debt recovery strategies and payment terms, to seek finance or insolvency support. Company cash flow must be protected at all costs for the business to remain viable.