Everything you need to know about cashflow

Cashflow is a fundamental part of every business and, in these unprecedented times, managing it correctly has never been more important

Think of monitoring cashflow like checking the pulse of your business, it’s a vital health check that’s needed to ensure everything is okay.

Understanding cashflow

Cashflow simply refers to the movement of money going in and out of your business in the form of income and expenditure.

Positive cashflow is every business’s aim and means that more money is coming into the business than going out. Businesses can use their positive cashflow to invest in growth and settle bills.

Negative cashflow means that the business will need an alternative source of income to pay off its expenses and debts.

While turnover provides a nice figure to give confidence that your business is doing well, cashflow offers a more accurate and realistic insight into your performance.

Why do you need to keep on top of your cashflow?

You’ll be putting your business at risk if you don’t regularly manage and monitor your cashflow, risking the following issues:

Overspending: While it may be tempting to celebrate and go on a spending spree when you win a new client, without a comprehensive understanding of your cashflow, it’s far too easy to spend money you don’t have.

Too much stock: Receiving a momentary surge of demand for a specific product can result in you upping your stock quantity. But if the demand changes, you could be left with stock you can’t shift, as well as debt.

Overtrading: Similar to overstocking, it’s also far too easy to employ more staff and acquire more locations after securing a large order/account. While your profits may vary, your rent and salaries won’t, so you need to have a firm understanding of your actual cashflow rather than a one-off sale.

Long payment terms: By offering lengthy payment terms, you put your business at risk as there will be periods where no money comes in. This poses the question, what will you do if there is a fire at the office or if a laptop needs replacing? It can be quite problematic when waiting for cash and there is also the possibility of bad debt resulting from customers not paying at all.

What is a cashflow statement?

Cashflow statements provide a clear overview of how much cash is available for operations while simultaneously detailing how the business is generating revenue.

The statement reveals a lot about how or if growth is taking place, providing valuable information to support planning.

You may even want to make a forecast based on how planned changes will be reflected in future cashflow statements.

Additionally, the statement provides a clear indication if you will be able to pay bills, indicating if you need to find an alternative source of finance.

What should your cashflow statement include?

A cashflow statement can be used to either add or subtract from your beginning cash balance and must be made up of the three following categories:

Financing: This shows any increase or decrease in long-term debt, dividends or capital.

Operating: This includes your net income and increases or decreases in your liabilities, expenses and assets.

Investing: This should reflect any increases or decreases in your long or fixed terms assets.

How can KashFlow help?

KashFlow provides an easy-to-use platform that allows you to streamline cashflow management, providing you with the tools needed to keep your accounts under control.

To try KashFlow for free, download a trial here.

Also, if you’re looking for more information on vital business processes to ensure your business is fully operational during the COVID-19 pandemic, click here to check out our support hub.