What is cash flow?

Cash flow is the money that comes in and goes out of a business. 

• Cash inflows (or money in) can be generated through the sale of goods or services, money earned through investments or money borrowed
• Cash outflows (or money out) cover the payment of expenses, payments to suppliers and buying equipment.

Cash inflows and outflows are classified in three sections:

1. Operating activities refer to cash flow generated through the business’ main operations, for example when goods are sold, services are provided or materials and supplies are purchased from a supplier. 
2. Investing activities cover cash flows generated from a long term investment, such as the acquisition (something that is bought to add to a collection of things) or sale of property and plant.
3. Financing activities refer to how a business is funded and can include investment from the owner and receipt or payment of bank loans.

Positive cash flow is when a business is generating more cash inflows than outflows. Negative cash flow is when cash outflows outweigh cash inflows.

A good cash position is driven by organisation and planning.  There are a number of actions a business can take in order to work towards maintaining a good cash position.

Cash is vital to any business to ensure that necessary business expenses can be paid. A business may expect a high volume of sales and large profits in the future, but if there is not enough cash coming in now to cover the business expenses then that profit may never happen.

Good cash flow is important as it means a business is able to meet its financial obligations when they become due – suppliers can be paid, loan repayments can be made, etc. Cash inflows eventually become cash outflows, so ensuring that cash receipts outweigh payments is key to a successful business.

Click on the download button below to access and use this cash flow statement. 

This document can help you:

• plan how much you expect to spend in costs
• plan out how much you expect to make in sales 
• keep an close eye on your cash position each month.

Cash refers to the amount of money a business has and is able to draw on immediately. 

Cash includes:

• money in hand
• petty cash
• any bank account balances. 

The cash balance is the net result of all cash inflows (money in) and outflows (money out).

Profit is the financial gain that is generated from a business’ operations, calculated by deducting costs from revenue (the amount of money a company receives). Profit does not take into account whether the revenue generated from sales has been paid in cash or is on credit and will be due at a later date, and similarly whether expenses have been paid in cash or will be due to be paid to the supplier in the future.

Upfront payments can also impact cash and profit differently. For example, if a business took the decision to buy a large value of materials in cash then the whole cost of this purchase would be reflected within the cash balance. However, if only half of the materials had been used by the end of the period then only half of the cost would be reflected within the profit number, with the remainder held as stock. For example if you had spent £600 on stock, but had only sold half of it during the accounting period, then your cash balance will have reduced by £600, but profit will only be reduced by £300 (the portion of the stock cost sold).

Simply, profit is recorded when a sale is made regardless of the transfer of funds, whereas cash flow is recorded when money is actually received or paid.