We talk a lot about business cash flow in general terms, and generally speaking it’s easy to think of it as the amount of money passing through your company at any given time.

That includes revenues raised from customers and clients, investors, loans and so on, set against outgoings on everything from renting premises to buying stock, paying staff and so on.

Good business cash flow means having enough coming in to pay for everything going out, and of course ideally you want to have a surplus left over as evidence that your company is growing in value.

What is business cash flow?

There is a technical definition of business cash flow, and it’s very simple.

Business cash flow is the difference between the amounts of money available to a business at the start and end of a particular reporting period.

So for example, you might track your business cash flow over the course of a month; subtract your available cash at the start of the month from the amount at the end of the month, and if the result is positive, then you have positive cash flow.

In a sense, it’s the equivalent of staying out of your overdraft; with positive cash flow, you should always have enough (or more than enough) to pay for whatever expenses you have going out.

Why cash flow is so important to a business

It may seem obvious why cash flow is so important to a business, but it goes beyond just being able to budget for your outgoings.

Positive cash flow is a sign of growth, which means you should be able to expand your business, buy more stock to benefit from bulk discounts, or appoint more staff.

Investors and lenders may also look for evidence of positive cash flow over the long term, as a sign that you are worth investing in, and that you will be able to meet your loan repayments.

Positive business cash flow is also linked with effective credit control – the sooner you get paid on invoices, the better it is for your cash flow – so doing better should allow you to reduce your bad customer debts and write-offs, as well as reducing your admin time on credit control and invoicing.

How to analyse business cash flow

There are a few decisions to make before you begin to analyse your business cash flow, for example the length of each time period you want to break the report down into.

It’s sensible to match this to your invoicing schedule – so if you invoice on 30-day terms, it can be sensible to work with a monthly cash flow report.

The other dimension of the report is to itemise income and outgoings by type, for example calculating revenues from sales separately from loan income and other investments.

Full analysis of your business cash flow is about understanding the balance between all of these – how money in from loans compares with money out on repayments and interest, for instance – and working to make the final figure as positive as possible.

How to improve business cash flow

In essence, improving business cash flow is about increasing the positive difference between the money coming into your company and the payments going out, but it can be more complicated than that too.

For instance, as mentioned above, effective credit control can mean the same overall amount of money is paid in faster, and this too boosts the available capital at any one time, rather than funds being locked up in outstanding invoices.

Meanwhile, it’s good practice to aim for consistent monthly figures – so that if you reach the same year-end figure with consistent monthly cash flow, you are less likely to have had any individual month where your account balance dropped dangerously low.


Business Cash Flow FAQs

Business cash flow vs. profit?

It’s easy to think that if your business cash flow is positive at the end of the month, it means you have made a profit, but that is not necessarily the case.

Profit generally relates to revenues raised from your business activities, set against internal costs like paying for stock.

But that doesn’t mean positive profit guarantees positive cash flow, or vice versa; remember cash flow can include loans and investment coming in too.

External finance can give you positive cash flow even if your company is not profitable – for example, when a new start-up is still building its customer base – and likewise if your company has large interest payments every month, these can lead to negative cash flow even if your core business is profitable.

How is business cash flow calculated?

At its most basic, business cash flow is the difference between everything coming into your company, and everything going out, from sales, loans and investments, to stock and operating costs, salaries and interest/repayments.

Remember it is usually calculated periodically, so you can compare month by month; this allows you to identify any inconsistencies in your cash flow, and also any seasonal effects you need to take into account.

Also remember, the basic calculation is total cash inflow minus total cash outflow: if this result is a negative figure, then you have more money going out of your company than coming in, putting you in the red and potentially threatening your long-term survival in business.

How to do a business cash flow forecast?

Calculating and analysing your business cash flow gives you the benefit of hindsight when it comes to making decisions for the future.

A business cash flow forecast takes this information and uses it to predict what your balance will be at the end of future months too.

You include any planned expenditure, along with the sales you realistically expect to make – and it’s fine to use an upper and lower range to allow for busy or quiet periods of business.

This should give you a set of ‘tramlines’ showing your maximum and minimum expected cash flow for the coming months, so you can decide how much you can risk putting into investments that offer less certain returns.

What is a business cash flow cycle?

A business cash flow cycle is often called a cash conversion cycle, or CCC, and is a measure of how long it takes for expenditure to translate into income.

For instance, if you buy stock, how many days will it take for you to sell that stock and receive payment? On a larger scale, how long must you wait before you see a return on the investment you make into expanding your company or hiring new staff?

The CCC is a numerical measure of this – usually expressed as a number of days – and gives you the insight you need to spend money with confidence about when you will recoup that investment.

How do you write a business cash flow statement?

A business cash flow statement will naturally be more complex for a larger company with many different revenue streams and outgoings, but its structure is generally quite similar.

You will typically set out your reporting periods across the top of the statement – including a starting position, and broken down into individual periods, usually of one calendar month or even of weeks if you want a more detailed idea of your cash flow.

Moving down the rows, you then set out your various sources of money coming into the company, from sales and receivables to loans and external investments, usually followed by a row totalling all of these sources of income for the period.

Below this is your section of outgoings, such as payables, loans and interest, and any other purchase costs, again with a sum total for the section.

Finally you calculate your cash flow – the difference between your total inflow and your cash out – and how much money is left in your business moving into the next period.

These bottom line figures are the most crucial, as they show you if your overall balance is heading in the right direction, but the itemised lines are important too as they allow you to identify where you have too much money going out, or where you could have more coming in.

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