• Naomi Cauley

What's so great about Cashflow?

Cash flow is the difference between the amount of cash coming into your business and the amount of cash going out.

Cash goes out of your business when you pay for expenses like rent, payroll or taxes or when you purchase assets like motor vehicles and equipment. Cash comes into your business when your customers or clients pay for your products or services, or when you sell assets, or when the owner introduces funds.

If the amount coming in is more than the amount going out, your business has a positive cash flow. Alternatively, if the amount going out is more than the amount coming in, your cash flow is negative.

If your business has a positive cash flow, your business can probably cover costs as they fall due. Keeping track of cash flow allows you to see by how much your cash has increased at the end of the month.

If your business has a negative cash flow, monitoring cash flow can help you calculate the additional sales needed to cover costs, or the amount of spending you’ll need to reduce.

Cash flow and profit are different

Cash flow isn’t the same as profit. Profit also considers not only revenue and expenses, but also non-cash expenses such as depreciation. Cash flow takes a broader look into incomings and outgoings that can include buying or selling fixed assets, taxes owed, owner drawings and loan payments.

Profit is the amount of revenue that remains after you've deducted all of your business expenses, while cash flow is about the amount of money you have available at a specific point in time.

Cash flow reporting

Looking back at your past cash flow can help uncover patterns for your business. It can give you an idea of how much money your business needs each month to cover costs. This can help with budgeting by discovering the ebbs and flows of your business and can help inform decisions about future spending.

Cash flow forecasting

Having due dates for invoice payments from customers and planned payment dates for your business's bills can help with cash flow forecasting. Cash flow forecasting looks at what cash could be coming in and out of your business in the future.

When considering your business's cash flow forecast, future invoice payments from customers and upcoming bill payments are all taken into account to help estimate your future financial position. Most importantly, cash flow forecasting can help you know if you're going to have enough money in your bank account to cover current and upcoming expenses.

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