Is cash flow all one word

Last Update: Jan 03, 2023

This is a question our experts keep getting from time to time. Now, we have got the complete detailed explanation and answer for everyone, who is interested!

Asked by: Prof. Hattie Crooks II

Score: 5/5
(33 votes)

The first thing I want to toss out is the word and term cash flow itself. … Mostly I´ll stick with cash flow. The two spellings of cash flow are of interest because it´s the tip of the iceberg of confusion and disagreement over what cash flow is and isn´t.

Is cash flow long term or short term?

Now that you have the basics of cash flow, look at your finances on a more granular level: short-term cash flow. This is the amount of money coming in and being spent on a daily, weekly, or monthly basis. It’s the day-to-day finances that keep your business running.

What exactly is cash flow?

Cash flow refers to the net balance of cash moving into and out of a business at a specific point in time. … Positive cash flow indicates that a company has more money moving into it than out of it. Negative cash flow indicates that a company has more money moving out of it than into it.

What is another word for cashflow?

In this page you can discover 12 synonyms, antonyms, idiomatic expressions, and related words for cash flow, like: pecuniary resources, available means, profitability, working capital, capital, stock-in-trade, available funds, available resources, cashflows, cashflow and liquidity.

What is the difference between cash and flow?

Profit is defined as revenue less expenses. It may also be referred to as net income. Cash flow refers to the inflows and outflows of cash for a particular business. Positive cash flow occurs when there’s more money coming in at any given time, while negative cash flow means there’s more money out.

27 related questions found

This is an issue that I recently came across when writing up the finances for a report. I was in charge of discounted cash flows so I needed to figure out whether it was «cash flow» or «cashflow». There appeared to be no simple definitive answer so I decided to write one. My conclusion is:

Although both are used cash flow is much more commonly used and so should be used.  

Tellingly performing a Google search for «cashflow» gives results that all use «cash flow» with the exception of brand names. 

Results obtained from searching «cashflow». I’m logged into two Google accounts which is why I have to use incognito (before you start accusing me of anything) Furthermore when I took a look at the annual reports of a few companies such as Drax Plc, Lancashire Holdings Ltd and Standard Chartered Plc they all use cash flow. Hence I would say that if you use cash flow you are in good company.  I guess this is a matter of prescriptive (how it should be) vs descriptive grammar (how it is actually understood). If we take a descriptive approach its clear that cash flow is the one that is best used.  If you stick with «cash flow» in your reports you should be fine. If you are challenged on it just quote some of the references I’ve given you.

Cash flow или денежный поток компании относится к разряду важнейших показателей, которое показывает перспективы развития компании. В этой статье мы подробно рассмотрим кэш флоу, поговорим о том, как он рассчитывается и какой бывает.

Кеш флоу (от англ. «Cash flow» — «денежный поток») — это совокупность денежных средств в компании, куда включены все притоки (прибыль) и оттоки (затраты). Составляется по утверждённой форме №4 (код формы по ОКУД 0710004).

Для определения результативности работы компании кэш флоу может дать множество полезных данных для инвесторов. Наиболее часто используется такой простой показатель, как «чистый денежный поток»:

Чистый денежный поток (от англ. «Net Cash Flow», NCF) — это разница между поступлениями и расходами в отдельно взятый период. Это значение может быть как положительным, так и отрицательным.

Формула чистого денежного потока:

NCF = ∑CF_i⁺ — ∑CF_j^—

Где:

• CF_i⁺ — поступления на счет фирмы;
• CF_j^— — списания со счета фирмы;

Положительное значение NCF означает, что дела компании идут неплохо: есть свободные деньги, а значит бизнес работает в плюс.

Известный инвестор Уоррен Баффет считает показатель Cash Flow одним из ключевых при оценке акций компании.

• Свободный денежный поток (Free Cash Flow) — что это такое;

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2. Показатель FCFF (Free Cash Flow to the Firm)

Показатель «Free Cash Flow to the Firm» (FCFF) дословно переводится «свободный денежный поток фирмы» — это денежный поток за вычетом налогов и чистых инвестиций в основной и оборотный капитал.

Формула свободного денежного потока фирмы:

FCFF = EBITDA × (1-Tax) + DA — CNWC — CAPEX

Где:

• Tax — ставка налога на прибыль;
• EBITDA — прибыль до уплаты процентов и налога;
• DA — амортизация материальных и нематериальных активов (Depreciation & Amortization);
• CNWC — изменение в чистом оборотном капитале (Change in Net Working Capital);
• CAPEX — капитальные расходы (Capital Expenditure);

Денежный поток можно рассчитывать по следующим видам цен:

• Текущие;
• Прогнозные (учитывают инфляцию и прогноз уровня добычи и других факторов);
• Дефлированные (с учетом инфляции по текущим ценам);

Дисконтирование Cash flow

Поскольку деньги обесцениваются каждый год, то и денежный поток сегодня не такой платёжеспособный как завтра. Чтобы внести поправки в будущую стоимость денег применяют коэффициент дисконтирования кэш флоу:

CF = 1/(1 + DS) × Time

Где:

• DS – дисконтная ставка;
• Time – период времени;

Рекомендую ознакомиться:

• Ставка дисконтирования — формула;

3. Кэш флоу операционной, инвестиционной и финансовой деятельности

Прямой и косвенный отчеты:

1. Прямой отчёт содержит информацию о денежном потоке по статьям;
2. Косвенный отчёт содержит лишь конечные данные без уточнения;

Отчёт о движении денежных средств (Cash Flow Statement) делится на три составляющие:

1. Операционная деятельность (operating cash flow, CFO);
2. Инвестиционной деятельности (cash flow from investing, CFI);
3. Финансовой деятельности (cash flow from financing activities, CFF);

На основании этого можно переписать формула чистого денежного потока в следующем виде:

ЧКФ = ЧКФО + ЧКФИ + ЧКФФ

Где:

• ЧКФО – суммарный поток от операционной деятельности;
• ЧКФИ – суммарный поток от инвестиций;
• ЧКФФ – суммарный поток от финансовых операций;

1 Операционная — это поток прибыли и расходов от ключевого направления фирмы.

Формула для расчета:

[Операционный денежный поток] = [Чистый доход] – [Амортизация] — [Проценты по займам] – [Налог на прибыль]

Что входит в операционные деятельность:

• Получение выручки от продажи товаров и предоставления услуг;
• Оплата счётов;
• Расчёты с бюджетом;
• Выплата заработной платы;
• Получение краткосрочных кредитов и займов;
• Погашение (получение) процентов по кредитам;
• Выплаты налога на прибыль;

Риски операционной деятельности:

• Коммерческий;
• Налоговый;
• Инфляционный;
• Валютный;
• Снижение финансовой устойчивости;
• Неплатежеспособность;

• Показатель OIBDA;

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2 Инвестиционная — это деньги, полученные от ценных бумаг, а также затраты на инвестиции.

Что входит в поступления:

• Продажа основных средств, нематериальных активов и прочих внеоборотных активов;
• Продажа акций других компаний;
• Погашение займов;

Что входит в отток:

• Приобретение основных средств, нематериальных активов и прочих внеоборотных активов;
• Покупка акций и долговых инструментов;
• Кредитование;

Риски инвестиционной деятельности:

• Инфляционный;
• Снижения финансовой устойчивости;
• Неплатёжеспособности;

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3 Финансовая — это все крупные денежные операции (кредиты, дивиденды, выкуп акций). Можно классифицировать на основе следующих параметров:

1. Направленности;
2. Масштабам;
3. Времени проведении операций;
4. Методу определения;
5. Уровню достаточности;

В поступление входит прибыль от эмиссии акций или иных выпусков ценных бумаг (облигаций, векселей, закладных, займов).

Риски финансовой деятельности:

• Кредитный;
• Процентный;
• Депозитный;
• Инфляционный;

Пример отчёта Cash Flow Сбербанка по годам:

4. Что оказывает влияние на Cash flow

Существует внешние и внутренние факторы, которые оказывают конечное влияние на результаты подсчетов кэш флоу.

Внешние факторы:

1. Конъюнктура товарного и фондового рынка;
2. Налогообложение;
3. Практика кредитования поставщиков и покупателей продукции;
4. Осуществления расчётных операций хозяйствующих субъектов;
5. Доступность финансового кредита;
6. Возможность привлечения средств безвозмездного целевого финансирования;

Внутренние факторы:

1. Жизненный цикл;
2. Продолжительность операционного цикла;
3. Сезонность;
4. Инвестиционные программ;
5. Амортизация;
6. Коэффициент операционного левериджа;
7. Корпоративное управление;

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5. Недостатки или критика показателя Cash Flow

Cash Flow является очень хорошим показателем для оценки эффективности бизнеса. Но есть и недостатки.

Например, если у компании есть большой чистый положительный денежный поток, то это говорит о том, что она просто не знает как эффективно распорядиться этими деньгами. Раздавать их в качестве дивидендов с одной стороны хорошо для акционеров, но плохо для дальнейшего развития. Ведь эти деньги можно направить на какие-то улучшения. Например, тот же выкуп акций с биржи может повысить курс.

С другой стороны, отрицательное значение также не всегда говорит, что дела идут плохо. Компания могла инвестировать крупные деньги в расширение и модернизацию своей деятельности. В обозримом будущем эти вложения могут принести крупные прибыли. А ведь это и есть главная цель каждого бизнеса.

Поэтому при оценке кэш флоу нужно смотреть и на саму деятельность компании: какие действия предпринимает текущее руководство, какие прогнозы по прибыли и прочие экономические показатели.

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Смотрите также видео «Управленческий учет отчет Cash Flow»:

What Is Cash Flow?

The term cash flow refers to the net amount of cash and cash equivalents being transferred in and out of a company. Cash received represents inflows, while money spent represents outflows.

A company’s ability to create value for shareholders is fundamentally determined by its ability to generate positive cash flows or, more specifically, to maximize long-term free cash flow (FCF). FCF is the cash generated by a company from its normal business operations after subtracting any money spent on capital expenditures (CapEx).

Understanding Cash Flow

Cash flow is the amount of cash that comes in and goes out of a company. Businesses take in money from sales as revenues and spend money on expenses. They may also receive income from interest, investments, royalties, and licensing agreements and sell products on credit, expecting to actually receive the cash owed at a late date.

Assessing the amounts, timing, and uncertainty of cash flows, along with where they originate and where they go, is one of the most important objectives of financial reporting. It is essential for assessing a company’s liquidity, flexibility, and overall financial performance.

Positive cash flow indicates that a company’s liquid assets are increasing, enabling it to cover obligations, reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against future financial challenges. Companies with strong financial flexibility can take advantage of profitable investments. They also fare better in downturns, by avoiding the costs of financial distress.

Cash flows can be analyzed using the cash flow statement, a standard financial statement that reports on a company’s sources and usage of cash over a specified time period. Corporate management, analysts, and investors are able to use it to determine how well a company can earn cash to pay its debts and manage its operating expenses. The cash flow statement is one of the most important financial statements issued by a company, along with the balance sheet and income statement.

Special Considerations

As noted above, there are three critical parts of a company’s financial statements:

• The balance sheet, which gives a one-time snapshot of a company’s assets and liabilities
• The income statement, which indicates the business’s profitability during a certain period
• The cash flow statement, which acts as a corporate checkbook that reconciles the other two statements. It records the company’s cash transactions (the inflows and outflows) during the given period. It shows whether all of the revenues booked on the income statement have been collected.

But the cash flow does not necessarily show all the company’s expenses. That’s because not all expenses the company accrues are paid right away. Although the company may incur liabilities, any payments toward these liabilities are not recorded as a cash outflow until the transaction occurs.

The first item to note on the cash flow statement is the bottom line item. This is likely to be recorded as the net increase/decrease in cash and cash equivalents (CCE). The bottom line reports the overall change in the company’s cash and its equivalents (the assets that can be immediately converted into cash) over the last period.

If you check under current assets on the balance sheet, that’s where you’ll find CCE. If you take the difference between the current CCE and that of the previous year or the previous quarter, you should have the same number as the number at the bottom of the statement of cash flows.

Types of Cash Flow

Cash Flows From Operations (CFO)

Cash flow from operations (CFO), or operating cash flow, describes money flows involved directly with the production and sale of goods from ordinary operations. CFO indicates whether or not a company has enough funds coming in to pay its bills or operating expenses. In other words, there must be more operating cash inflows than cash outflows for a company to be financially viable in the long term.

Operating cash flow is calculated by taking cash received from sales and subtracting operating expenses that were paid in cash for the period. Operating cash flow is recorded on a company’s cash flow statement, which is reported both on a quarterly and annual basis. Operating cash flow indicates whether a company can generate enough cash flow to maintain and expand operations, but it can also indicate when a company may need external financing for capital expansion. 

Note that CFO is useful in segregating sales from cash received. If, for example, a company generated a large sale from a client, it would boost revenue and earnings. However, the additional revenue doesn’t necessarily improve cash flow if there is difficulty collecting the payment from the customer.

Cash Flows From Investing (CFI)

Cash flow from investing (CFI) or investing cash flow reports how much cash has been generated or spent from various investment-related activities in a specific period. Investing activities include purchases of speculative assets, investments in securities, or the sale of securities or assets.

Negative cash flow from investing activities might be due to significant amounts of cash being invested in the long-term health of the company, such as research and development (R&D), and is not always a warning sign.

Cash Flows From Financing (CFF)

Cash flows from financing (CFF), or financing cash flow, shows the net flows of cash that are used to fund the company and its capital. Financing activities include transactions involving issuing debt, equity, and paying dividends. Cash flow from financing activities provide investors with insight into a company’s financial strength and how well a company’s capital structure is managed.

Cash Flow vs. Profit

Contrary to what you may think, cash flow isn’t the same as profit. It isn’t uncommon to have these two terms confused because they seem very similar. Remember that cash flow is the money that goes in and out of a business.

Profit, on the other hand, is specifically used to measure a company’s financial success or how much money it makes overall. This is the amount of money that is left after a company pays off all its obligations. Profit is whatever is left after subtracting a company’s expenses from its revenues.

How to Analyze Cash Flows

Using the cash flow statement in conjunction with other financial statements can help analysts and investors arrive at various metrics and ratios used to make informed decisions and recommendations.

Free Cash Flow (FCF)

Analysts look at free cash flow (FCF) to understand the true cash generation capability of a business. FCF is a really useful measure of financial performance and tells a better story than net income because it shows what money the company has left over to expand the business or return to shareholders, after paying dividends, buying back stock, or paying off debt.

Free Cash Flow = Operating Cash Flow — CapitalEx

Unlevered Free Cash Flow (UFCF)

Use unlevered free cash flow (UFCF) for a measure of the gross FCF generated by a firm. This is a company’s cash flow excluding interest payments, and it shows how much cash is available to the firm before taking financial obligations into account. The difference between levered and unlevered FCF shows if the business is overextended or operating with a healthy amount of debt.

Example of Cash Flow

Below is a reproduction of Walmart’s cash flow statement for the fiscal year ending on Jan. 31, 2019. All amounts are in millions of U.S. dollars.

The final line in the cash flow statement, «cash and cash equivalents at end of year,» is the same as «cash and cash equivalents,» the first line under current assets in the balance sheet. The first number in the cash flow statement, «consolidated net income,» is the same as the bottom line, «income from continuing operations» on the income statement.

Because the cash flow statement only counts liquid assets in the form of CCE, it makes adjustments to operating income in order to arrive at the net change in cash. Depreciation and amortization expense appear on the income statement in order to give a realistic picture of the decreasing value of assets over their useful life. Operating cash flows, however, only consider transactions that impact cash, so these adjustments are reversed.

The net change in assets not in cash, such as AR and inventories, are also eliminated from operating income. For example, $368 million in net receivables are deducted from operating income. From that, we can infer that there was a $368 million increase in receivables over the prior year.

This increase would have shown up in operating income as additional revenue, but the cash wasn’t received yet by year-end. Thus, the increase in receivables needed to be reversed out to show the net cash impact of sales during the year. The same elimination occurs for current liabilities in order to arrive at the cash flow from operating activities figure.

Investments in property, plant, and equipment (PP&E) and acquisitions of other businesses are accounted for in the cash flow from the investing activities section. Proceeds from issuing long-term debt, debt repayments, and dividends paid out are accounted for in the cash flow from financing activities section.

The main takeaway is that Walmart’s cash flow was positive (an increase of $742 million). That indicates that it has retained cash in the business and added to its reserves in order to handle short-term liabilities and fluctuations in the future.

The Bottom Line

Cash flow refers to money that goes in and out. Having a positive cash flow means there’s more money coming in while a negative cash flow indicates a higher degree of spending. The latter isn’t necessarily a bad thing because it may mean that you’re investing your money in growth. But if your spending becomes excessive, you won’t have enough for a rainy day and you won’t be able to pay your suppliers or lenders. Whether you’re running a business or a household, it’s important to keep on top of your cash flow.

From Wikipedia, the free encyclopedia

A cash flow is a real or virtual movement of money:

• a cash flow in its narrow sense is a payment (in a currency), especially from one central bank account to another; the term ‘cash flow’ is mostly used to describe payments that are expected to happen in the future, are thus uncertain and therefore need to be forecast with cash flows;
• a cash flow is determined by its time t, nominal amount N, currency CCY and account A; symbolically CF = CF(t,N,CCY,A).
• it is however popular to use cash flow in a less specified sense describing (symbolic) payments into or out of a business, project, or financial product.

Cash flows are narrowly interconnected with the concepts of value, interest rate and liquidity.
A cash flow that shall happen on a future day t_N can be transformed into a cash flow of the same value in t₀. This transformation process is known as discounting, and it takes into account the time value of money by adjusting the nominal amount of the cash flow based on the prevailing interest rates at the time.

Cash flow analysis[edit]

Cash flows are often transformed into measures that give information e.g. on a company’s value and situation:

• to determine a project’s rate of return or value. The time of cash flows into and out of projects are used as inputs in financial models such as internal rate of return and net present value.
• to determine problems with a business’s liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash even while profitable.
• as an alternative measure of a business’s profits when it is believed that accrual accounting concepts do not represent economic realities. For instance, a company may be notionally profitable but generating little operational cash (as may be the case for a company that barters its products rather than selling for cash). In such a case, the company may be deriving additional operating cash by issuing shares or raising additional debt finance.
• cash flow can be used to evaluate the ‘quality’ of income generated by accrual accounting. When net income is composed of large non-cash items it is considered low quality.
• to evaluate the risks within a financial product, e.g., matching cash requirements, evaluating default risk, re-investment requirements, etc.

Cash flow notion is based loosely on cash flow statement accounting standards. The term is flexible and can refer to time intervals spanning over past-future. It can refer to the total of all flows involved or a subset of those flows.

Within cash flow analysis, 3 types of cash flow are present and used for the cash flow statement:

• [Operating cash flow] — a measure of the cash generated by a company’s regular business operations. Operating cash flow indicates whether a company can produce sufficient cash flow to cover current expenses and pay debts.
• Cash flow from investing activities — the amount of cash generated from investing activities such as purchasing physical assets, investments in securities, or the sale of securities or assets.
• Cash flow from financing activities (CFF) — the net flows of cash that are used to fund the company. This includes transactions involving dividends, equity, and debt.

Business’ financials[edit]

The (total) net cash flow of a company over a period (typically a quarter, half year, or a full year) is equal to the change in cash balance over this period: positive if the cash balance increases (more cash becomes available), negative if the cash balance decreases. The total net cash flow for a project is the sum of cash flows that are classified in three areas:

• Operational cash flows: cash received or expended as a result of the company’s internal business activities. Operating cash flow of a project is determined by:
  • OCF = incremental earnings+depreciation=(earning before interest and tax−tax)+depreciation
  • OCF = earning before interest and tax*(1−tax rate)+ depreciation
  • OCF = (revenue − cost of good sold − operating expense − depreciation)* (1−tax rate)+depreciation
  • OCF = (Revenue − cost of good sold − operating expense)* (1−tax rate)+ depreciation* (tax rate)

Depreciation*(tax rate) which locates at the end of the formula is called depreciation shield through which we can see that there is a negative relation between depreciation and cash flow.

• Changing in net working capital: it is the cost or revenue related to the company’s short-term asset like inventory.
• Capital spending: this is the cost or gain related to the company’s fix asset such as the cash used to buy a new equipment or the cash which is gained from selling an old equipment.

The sum of the three component above will be the cash flow for a project.

And the cash flow for a company also include three parts:

• Operating cash flow: refers to the cash received or loss because of the internal activities of a company such as the cash received from sales revenue or the cash paid to the workers.
• Investment cash flow: refers to the cash flow which related to the company’s fixed assets such as equipment building and so on such as the cash used to buy a new equipment or a building
• Financing cash flow: cash flow from a company’s financing activities like issuing stock or paying dividends.

The sum of the three components above will be the total cash flow of a company.

Examples[edit]

Description	Amount ($)	totals ($)
Cash flow from operations		+70
Sales (paid in cash)	+30
Incoming loan	+50
Loan repayment	-5
Taxes	-5
Cash flow from investments		-10
Purchased capital	-10
Total		60

The net cash flow only provides a limited amount of information. Compare, for instance, the cash flows over three years of two companies:

	Company A	Company B
	Year 1	Year 2	Year 3	Year 1	Year 2	Year 3
Cash flow from operations	+20M	+21M	+22M	+10M	+11M	+12M
Cash flow from financing	+5M	+5M	+5M	+5M	+5M	+5M
Cash flow from investment	-15M	-15M	-15M	0M	0M	0M
Net cash flow	+10M	+11M	+12M	+15M	+16M	+17M

Company B has a higher yearly cash flow. However, Company A is actually earning more cash by its core activities and has already spent 45M in long term investments, of which the revenues will only show up after three years.

See also[edit]

• Capital gain
• Cash flow sign convention
• Cash flow hedge
• Cash flow projection
• Cash flow statement
• Investment
• Owner earnings
• Passive income
• Profit
• Return of capital
• Return on equity

References[edit]

Further reading[edit]

• Auerbach, A. J., & Devereux, M. P. (2013). Consumption and cash-flow taxes in an international setting (No. w19579). STICERD — Public Economics Programme Discussion Papers 03, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. National Bureau of Economic Research.

External links[edit]

• A Review of Academic Research on the Reporting of Cash Flows from Operations

Many a new business owner has asked, “What is cash flow and why is it so important?” The short answer is cash flow is the amount of money coming into a business and the amount of money going out. Think of it as a water tank: water comes in at the top and drains out the bottom. So to keep your tank nice and full, you want more coming in than going out. End of article, right? Well, not really…

Profit and Cash Flow Are Not The Same

This is a common mistake small business owners make when they first enter the world of accounting and bookkeeping. So what’s the difference between the two?

Profit, also known as net income, is your business’ revenue less the expenses. In the other words, your net income is what you actually get to keep after covering all of your business expenses.

In contrast, cash flow refers to the inflows and outflows of cash for your business.

Read more about the difference between Cash flow and profit here!

Cash Inflow

Cash inflow is the lifeblood of your business and comes from sources like payments from customers, receipt of a loan, monetary infusion from an investor, or interest on savings or investments. Cash is also important because it later becomes the payment for things that make your business run: expenses like stock or raw materials, employees, rent and other operating expenses. Naturally, positive cash flow is preferred. Positive cash flow means your business is running smoothly. High positive cash flow is even better and will allow you to make new investments (hire employees, open another location) and further grow your business. We love that, right!?! Conversely, there’s negative cash flow: more money paying out than is coming in.

Get Organized and Plan

Positive cash flow is driven by two things: organization and planning.

Organizing

Let’s start with setting your baseline. Begin by looking at the cash you have in hand, this could be money you’ve invested in the business, cash in the business bank account, loans that you’ve received, or an investment from a partner.

If you’re just starting your business, your interest in cash flow is well-timed. Make a list of all the one-time start-up expenses that you have paid or expect to pay. Think incorporation fees, legal and accounting, licenses and permits, construction or remodeling, a security deposit on a rental agreement or purchasing property, marketing materials, and signage, initial inventory or supplies, fixtures like cash registers, office supplies, furniture, equipment, etc.

Planning

Next, you want to determine your monthly expected cash sources. These can be projected sales, loans that you know are coming in at a certain date, investments from partners or investments. If you’re a new business you might want to project sales conservatively (better to outperform and have a better inflow of cash than you thought). If you’ve already started your business or are purchasing a business from someone else, you have a distinct advantage: sales history. History can’t predict the future, but it can paint a decent picture of what the future looks like and what business changes you might need to make.

Related: Projecting Your Cash Flow

Finally, you will need to assess your monthly expenses. This can be a bit tricky because it’s easy to overlook things and get a surprise you really don’t want. Monthly expenses to factor in can include rent or mortgage, insurance, advertising, marketing, website hosting, travel, utilities, payroll, inventory, taxes, loan payments, working capital, and last but not least paying yourself!

The most important thing about this process is being honest and objective. Do your homework and get accurate estimates of costs. If costs look high, simply projecting more sales when you don’t have the capacity to close those sales won’t fill that proverbial water tank. So perhaps you tighten the outflow. What can you reduce or cut? For example, if you’re launching a boutique, maybe you rent that 500 square foot space instead of the open, airy 1,000 square foot one. Or maybe you initially limit the amount of merchandise you buy. (Added bonus: if the merch is in high demand, you’ve not got scarcity on your side!)

Related: Managing Your Small Business Cash Flow Without Spreadsheets

Calculating Your Operating Cash Flow Margin

The Operating Cash Flow Margin (also called the Cash Flow Margin, or Margin Ratio), is one of the most commonly used profitability ratios. It’s a measure of how much money you are generating from your operations per every dollar in sales you bring in. Generally the higher the Operating Cash Flow Margin the better and if this ratio increases over time, it’s an indication that your business is getting better and better at converting earnings from sales into cash flow!

The formula for calculating this number is: Operating Cash Flow Margin = Cash Flow from Operations / Net Sales

Related: What is Operating Cash Flow Margin and Why Is It Important

Get Paid! How to Improve Incoming Cash Flow

If you invoice customers and they have a liberal time frame in which to pay you, that can make planning tricky. However, there are ways to encourage your customers to pay their bills more quickly:

• Issue invoices promptly and follow up on them regularly. This sounds simple, but many people put off or avoid paying others simply because they don’t like parting with their money.
• Offer a discount for early payment. If your standard contract has a thirty-day term, give a small discount for payment within 10 days.
• Structure the payment with an upfront deposit or, if it’s a long project, schedule payment intervals throughout the project lifetime. This will ensure that you are getting some cash in the door along the way.

Related: How To Get Paid Faster

Paying Your Bills the Smart Way

You have to pay your bills, no two ways around it. It’s to your advantage to pay them in a timely fashion if you want to build trust with your creditors. (Plus some say it’s good karma.) But since we’re talking about outflow, we need to consider good ol’ cash flow. There are ways to pay your bills in a smart way to make sure that your cash flow remains positive:

• Use the payment term to its fullest. If you have a thirty-day term on a bill, go ahead and use the thirty days to build up the cash. That way, you’ll have a better handle on what your cash flow looks like than if you simply write a check the day you receive the invoice.
• On the flip side, see if there are discounts for paying suppliers early. (Sounds familiar, no?)
• Ask about flexible payment terms when you make a deal with a vendor. You’ll never know if you don’t ask and it could help you out in a pinch. Be cautious with this though: asking for flexible payment terms before a deal is done can raise suspicion.
• Set up ETF payments. That way you can pay immediately when a payment is due, but won’t have to let go of the funds before you’re ready.
• Build a real relationship with your vendors. If they trust you and you’re honest with them it could go a long way to making your life easier if you need to ask for an extension or accommodation.

Related: Should You Be Your Own Bookkeeper or Hire One?

Surviving Lean Months

We all know that there can be a lag between sales and receipt of payment. But the bills aren’t going to magically disappear or change their due dates because you haven’t collected payment. You’ve got to have enough cash to get you through lean months when the flow just isn’t there.

Build up some cash reserves to avoid this problem. Review your cash flow history and arrive at a reserves estimate that would cover your business for three months, six months, and a year. Just knowing those numbers can help you paint a better picture and, thus, make better business decisions.

You can also arrange a line of credit with your bank. When you’re flush it’s easier to get money than when you’re not, so you can talk to your banker about having the ability to borrow up to a preset limit any time you need it.

Related: Entering a Slow Season: Ways To Boost Your Business

Or check out How To Boost Your Cash Flow With Accounting Software

More Tips on Managing Your Cash Flow

With cash flow being one of the most critical components of a small business, it’s important you take the necessary steps daily, weekly, and monthly to make sure you are organized and on top of your numbers. Here are our best suggestions on managing your cash flow:

1. Reconcile your book every morning
2. Review your accounts receivable weekly
3. Review large credit card balances/credit lines
4. Save for a rainy day and set aside for taxes
5. Spend next month’s expenses on last month’s income

To read more about each of these steps, check out our comprehensive guide on managing your cash flow!

We’ve also had guest Danetha Doe, a financial growth consultant for small businesses, talk about managing cash flow with income fluctuations here.

So, now you know what cash flow is, put that knowledge to work for you! Have more questions? Email us at answers@kashoo.com or reach out to other like-minded small business owners in our Facebook community!