The Importance of Cash Flow

Whilst making profit is the key aim when it comes to a successful business, cash flow is just as important.

What is Cash Flow?

Put simply, cash flow is the amount of cash coming into and out of the business. Cash coming into the business is known as 'inflows,' whilst cash going out of the business is referred to as 'outflows.'

This information is often represented in a cash flow forecast, and is an essential financial statement for any business to predict the future of the business, make important decisions and approach investors or other sources of capital.

Examples of Inflows and Outflows

Whilst you may think inflows are purely the revenue made from sales, there can also be inflows in the form of investment, interest and credit sales.

Outflows often include rent, raw materials, paying staff wages and other overheads that come with the running of your business.

It's incredibly important to keep reports of all money flowing in and out of your business so you can evaluate your business's overall financial performance.

Credit Sales

Not having a good cash flow can cause problems for your business as it means you may not be able to afford certain costs at specific periods of time.

Credit sales can sometimes cause cash flow problems. This is because money is caught up in future finances, so even though you will have money coming in, the money isn't entering your business right now. Therefore, one month you may have more outflows than inflows despite a sale being made, then the following month there is an unexpected amount of cash coming in from that credit sale.

'Caught Up' Cash Flow

Another example of cash flow being altered is your products and assets. For example, if you sell a product but the sale takes a long time to go through, or your product has a long shelf-life and can spend months waiting to be bought, this can also affect your cash flow.

This is because your cash is 'caught up' in your product because there is a long turnaround between the creation of your product and its final sale.

Need a Hand?

We know that understanding cash flow and implementing strategies to ensure a consistent and positive cash flow can be difficult, that's why we're here to help!

Get in touch with one of our offices today if you have any questions about, or are struggling with your cash flow.

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