Let’s talk about cash flow. It’s a term you’ve likely heard a hundred times, but do you know how to determine your cash flow and what it really means for your business? I can tell you firsthand that understanding your cash flow is key to running a healthy business. It’s not just about how much money you’re making—it’s about understanding how cash is moving in and out of your business.
What Is Cash Flow, Really?
At its core, cash flow is the movement of money in and out of your business. Think of it like this: cash inflows are the money coming in, typically from sales, loans, or investments. Cash outflows are the money going out—things like rent, salaries, inventory, and other expenses. When your inflows exceed your outflows, you’ve got positive cash flow (yay!). When the reverse is true, you’re dealing with negative cash flow (and that’s a problem).
Understanding your cash flow is crucial because it reflects your business’s financial health. You might have great sales, but if too much of your money is tied up in unpaid invoices or inventory, you could still face cash flow problems. That’s why knowing your actual cash flow is essential—it gives you insight into whether you can pay the bills, invest in growth, or need to tighten your belt.
How to Determine Your Cash Flow
Determining your cash flow isn’t as complicated as it sounds. It just takes a little attention to detail. Here’s how to break it down:
1. Track Your Cash Inflows
The first step is to tally up all the sources of cash coming into your business. For most businesses, this includes:
- Sales revenue: Cash generated from your products or services.
- Investments: Any external funding or capital infusions.
- Loans: Money borrowed from financial institutions.
Make sure you account for when the cash is actually received. If you invoice a client today, but the payment won’t come in for 30 days, that’s not cash flow yet—it’s an outstanding receivable.
2. Calculate Your Cash Outflows
Next, you need to track all the money leaving your business. This includes:
- Operational expenses: Things like rent, utilities, salaries, and office supplies.
- Cost of goods sold (COGS): The direct costs tied to the production of goods or services.
- Loan repayments: Any monthly payments toward outstanding loans.
- Taxes: Don’t forget taxes—they’re a major cash outflow that can’t be ignored.
Again, timing is everything. Even if you’ve committed to an expense, it doesn’t impact your cash flow until the money actually leaves your account.
3. Plug It Into a Formula
Now, you can calculate your cash flow with a simple formula: Cash Flow=Cash Inflows−Cash Outflows
If the number is positive, congratulations—you have a positive cash flow. If it’s negative, you’ll need to take a closer look at your finances and make some adjustments.
The Importance of Cash Flow Statements
To get a more formal, detailed view of your cash flow, you’ll want to create a cash flow statement. This financial report shows you exactly how cash has moved through your business over a certain period. There are three main sections of a cash flow statement:
- Operating Activities: This section covers the day-to-day business activities, like sales and expenses.
- Investing Activities: This includes cash used for buying or selling assets, such as equipment or property.
- Financing Activities: This shows cash coming in from loans or being paid out to cover loan repayments or dividends.
By generating a cash flow statement regularly, you can see how well your business is managing its cash—and identify any areas where you might need to tighten up.
Why Cash Flow Matters So Much
So, why is cash flow such a big deal? Well, positive cash flow is the key to staying in business. It means you’re able to cover your costs, invest in growth, and pay down any debt. Without it, even a profitable business can run into trouble fast.
On the other hand, negative cash flow can signal trouble. If you don’t have enough cash on hand, you might struggle to pay your bills, meet payroll, or keep operations running smoothly. That’s why regularly monitoring your cash flow and making adjustments as needed is so crucial.
Tools to Help You Stay On Top of Cash Flow
While you can track cash flow manually, it’s much easier and more efficient to use a tool designed for the job. That’s where SimplyCashFlow.io comes in. Our platform helps you stay on top of your cash flow in real time, providing you with accurate forecasts and easy-to-understand insights.
With SimplyCashFlow.io, you can track your inflows and outflows, project your cash flow for the next 30, 60, or 90 days, and spot potential shortfalls before they become a crisis. Plus, you’ll get recommendations on how to optimize your cash flow—so you can make smarter, data-driven decisions for your business.
Cash flow isn’t just a number on a report—it’s the lifeblood of your business. By regularly determining and monitoring your cash flow, you’ll have a much clearer picture of your financial health. This allows you to plan ahead, avoid cash crunches, and keep your business running smoothly.
Sign up for SimplyCashFlow.io today to gain access to advanced forecasting tools, real-time insights, and expert support to help you master your cash flow.