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A Guide To Cash Flow
The financial term cash flow is most often used to describe the 'flow' of money that comes into a business and that then goes out of it. Cash flow analysis and reporting can be applied for a specific period of time (i.e. a financial year) or on a project or product basis.
This is a useful analysis and reporting mechanism for businesses of all sizes. It can, for example, help measure the actual state of a business. In an ideal world a business needs more cash coming in than is going out in order to get to a profitable state and to have a healthy cash flow balance.
Cash flow should not, however, be mixed up with profit and loss in basic terms. A business can be profitable without having a positive cash flow. For example, if a business has sold a lot of products but has not yet received payments for them then they may have a negative cash flow but potentially they may look like a profitable operation.
Cash flow is often applied to assess the liquidity and stability of a business operation or indeed of a specific project or product/service line. If a business has a positive cash flow then they can be termed as being liquid. A negative cash flow, however, can cause real liquidity problems which could lead to business failure even if the company itself is deemed as being a profitable concern.
Cash flows can be measured by businesses in various ways and for various purposes. As we have already seen a basic operational cash flow measurement will give a snapshot of the liquidity of a company to help it assess whether it has a positive or negative cash flow at any given time.
Other cash flow measurements that are often used by business include investment cash flows (i.e. cash into/from spending and investment) and financing cash flows (i.e. cash into/from share responsibilities and loans and so on). A company that looks at all of these cash flow options will end up with a net cash flow measurement.
The aim of most businesses is to have a net cash flow that errs on the side of the positive rather than the negative. Having a healthy influx of cash balanced against your spending can simply help your business stay afloat especially if unforeseen expenses or market conditions cause problems in the future.
Many small businesses, however, find it hard to find their feet when it comes to cash flow. They may be selling enough to make them look like a going concern but they may have issues with actually getting money paid into the company to keep a healthy cash flow margin.
There are various ways that companies can work on this issue. Some, for example, will 'sell' their invoices to factoring companies who will chase payments for them. This can be a useful solution for smaller businesses that may not have the staff or resources to chase for payment. This kind of solution can also help with cash flow itself as the factoring company will pay a proportion of the money owed to the company immediately which can help keep cash moving.
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