- Learn why cash flow is so important.
- Discover the different types of cash flow.
- Find out how to track cash flow.
As the name suggests, cash flow is a term used to describe the money coming into and out of a business. Cash received – like money being paid to the business from its customers – would be inflow. Cash spent – like the funds being paid to vendor partners and other operational costs – would be outflow.
Obviously, it's always important to have more money coming into your business than going out in most situations. But whether this is true is not the only factor you should be accounting for. Instead, it should be seen for what it really is – a metric that tells just one small part of a much larger story.
Breaking Things Down
One of the reasons why keeping an eye on cash flow is so important is because it helps paint a vivid picture of a business's liquidity. The more liquid a company is, the more flexible it is.
A significant amount of positive cash flow relative to outflow indicates that a company's liquid assets are increasing. This is something that should happen naturally over time as a business continues to grow and scale. This doesn't just mean that they're comfortable when it comes to handling their financial obligations. They can take some of that money and strategically invest it back into the business itself. In this way, it can make the biggest impact.
This type of positive flow also acts as a viable buffer against any uncertainty or even challenges that may develop. Case in point: everything that has been going on over the last few years with the still-ongoing COVID-19 pandemic. When the pandemic first hit in March 2020, businesses of all types found their doors suddenly closed. The ones that were able to survive to the point where they could re-open again – or at least remain afloat for as long as possible – were those that had liquidity.
Types of Cash Flow
In a larger sense, there are a few different types of cash flow to concern yourself with. Operating cash flow refers to the amount of money that a company is generating via everyday activities. Investment cash flow, as the name suggests, is income generated from investment actions like purchasing securities.
Financing cash flow goes into more detail about how money is moving between a business and a number of other entities like investors, owners, and even creditors.
Again, tracking business cash flow is all about the insight it generates. It allows you to keep the doors open because you know you have enough money to handle your obligations. It also helps to meet your short and long-term goals for expansion as well. In essence, it helps those business leaders come up with the best possible plan for the future. This is also why this is something you need to be taking a look at on a regular basis.
Tracking Cash Flow: An Overview
All told, tracking cash flow over the long term is something that will be accomplished through a few different financial statements. The first of these is the balance sheet, which simply puts together an outline of a company's current assets and liabilities.
Next, we have the income statement. This is a document that helps highlight a company's profitability at a particular moment in time.
Finally, you have the actual cash flow statement. Think of this as something like a checkbook in nature – this statement confirms that all the other data on the statements mentioned above is as accurate as possible.
This statement provides a detailed overview of a company's cash-based transactions, both going in and coming out of the business. It can also help indicate how many unpaid invoices may be out there. Collecting them can help reconcile the books and improve flow as much as possible.
In the end, business cash flow is always an essential part of any organization. You need visibility into where money is coming from and where it's going in order to make the most informed decisions possible at all times. That's why it's always recommended that you enlist the help of a professional to handle this critical matter on your behalf – that way you can leverage their expertise to your advantage, all so that you can focus more on your business, the way it should be.
Want additional insight into business cash flow? Have additional questions that you'd like to go over with someone in a bit more detail? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.