Many people boldly say that cash is king, but the reality is that only a few companies or businesses have mastered cash flow management.
A business research report published last year showed that up to 60 percent of small businesses in America have cash flow challenges. At least 82 percent of the respondents lamented that their business operations got disrupted because of an adverse cash outflow scenario.
What are inflow and outflow?
Cash generated from activities of any business or corporation makes up cash inflows. Common examples include sales of products or services, receipts from accounts receivables, disposal of inventory, the realization of fixed investments, and short-term contracts, among others.
Examples of cash outflow
Payments made by a business during its day-to-day operations are cash outflows. These can be payments to other businesses or individuals for inventory restocking or raw materials.
Payments made to clear bank loans, acquire fixed assets, settle wages and salaries, and dividends to shareholders also fall within the description of cash outflows.
What is cash flow?
Cash flow is best described as the sum of the income flowing into and out of business. Cash flow is not the same as working capital or gross/net profit, and the distinction needs to be made.
In a business, profit is earned after deducting the cost of sales and operational expenses from turnover, while cash flow is the total income and expenditure. Cash flow is made up of cash inflows and outflows. Cash flow can either be positive cash flow or negative cash flow.
Cash flows have three major components in a business operation and financial reports, and these are:
• Operating activities
The operating segment of cash flows accounts for operating expenses, which include the likes of rent, electricity, and heating, raw materials cost, inventory, etc. These items can flip the cash flows negatively if not kept within budgeted limits.
• Investing activities
Investing activities can help steer your business to maintain positive cash flows. The common examples are futures, stocks in valuable entities, and intangible assets, among others. A healthy mix of this set of activities can help you grow your cash flow and safeguard steady cash inflows when most needed.
• Financing activities
In the financing activities class, decisions made here can make or break your business if treated with levity. Actions like investment in energy-efficient production facilities or financing concessions with fund providers can give your business the needed positive cash flow.
How to track your cash inflows and outflows
Tracking cash inflows and outflows is important for every business as it gives a clear picture of where the money is coming from and how it is utilized. The first step in tracking inflows and outflows is to use the source documents that gave rise to each transaction. The following steps are needed:
- Record each inflow from sales, services rendered, and investment income as they occur and track these always
- All expenses should be documented, and the source documents sorted to reflect all operating expenses incurred
- These details above should be systematically updated each day into your cash flow spreadsheet
- A cash flow statement should be generated to have a snapshot of the inflows and outflows of your company
Tools used for cash flow tracking
To track cash flows is to have a clear picture of the inflow and outflow of cash in your business. Tracking can be manual in terms of bookkeeping using ledgers and books of account that are written up using pen and physical books. However, there is an alternative approach with digital apps and software like Excel.
The use of digital apps or computerized accounting tools is considered to be more accurate and less time consuming. Accuracy is assured with the introduction of digital apps that have passed the quality test and proven by experts.
There are different tools for tracking cash inflow and outflow apart from using an Excel spreadsheet. While Excel is an improvement on manual tracking, computerized solutions like Quickbooks Online are also recommended. CashflowTool and Float are among other common alternatives to Excel.
How to maintain positive cash flows
To have a positive cash flow, your business inflows need to surpass your outflows significantly, leading to healthy profits. On the flip side, when your outflows surpass your inflows and dry up your profits, you are going to have negative cash flows.
Key decisions like putting in place the needed framework for checks and evaluation of cash budgets are important to maintain positive cash flows. A well-staffed treasury department can get this done.
You need to control your debt exposure and how much is expended on debt servicing in relation to your inflows. If a huge portion of your inflows is utilized to finance debts, equipment repairs, and other overheads, negative cash flows could result.
Optimal treasury management will be required to avoid business failures in this regard.
You also need to keep a tab on debt exposure and the quantum of its financing in relation to your inflows. If a huge portion of your inflows is swamped by financing cost, equipment repairs, and overhead, negative cash flows will result.
Lastly, you need professionals to achieve the needed balancing act in this segment of your business finances.
Other necessary steps that you need to take include:
- Offer quality goods and excellent services to retain customers, win new ones, and secure positive cash flows
- Make your brand visible with strategic advertising
- Utilise your cash surplus to invest in value stocks and profitable companies
- Ensure accurate record keeping, financial statements preparation, and integrity of business transactions
- Reduce operating expenses to the minimum, where possible.
What is the difference between cash flow and inflow?
Cashflow is the total of inflows and outflows in your business, while inflow is the cash generated by the business. Inflow is, therefore, only a part of the whole, while cash flow covers both sides of the coin. The proportion of your inflow to overall outflow will impact your net cash flow.
How do you calculate cash inflow and outflow?
A financial statement provides the most realistic template for cash flow analysis. To understand cash inflow and outflow for your business, you need the advantage of financial reports.
The statement of cash flows shows in a snapshot the cash movement and the activities that have resulted in the closing cash and cash equivalents in any specific period.
In the financing activities segment of cash flow statements, the business shows how it raised capital and settled competing providers of funds. Also shown are:
- The issuing and sale of stock
- Payment of cash dividends
- Raising of loans
When calculating inflows and outflows, some rules need to be implemented, and they are important in cash flow analysis. All financial implications in your business will either add to your cash flow or reduce it, making them either positive or negative in overall effect.
An injection of cash or inflow in a business is shown as a positive number in the cash flow statement, while a payment or cash outflow is shown as a negative number.
Examples of outflows will include debt payment or asset acquisition, while inflows will include supplies received on credit or a new loan received.
Your cash flow statements record cash inflows with all its income activities or such strategies that add to your profit. A company’s cash outflows are debts, operating costs, and related liabilities that lead to payments and other expenditure.
Cash flow projection and forecasting
To meet the set goals for your business, there are important processes and practices that you need to commit to and implement. Every finance department should prepare cash flow statements and engage in forecasting outflows and inflows, looking out for shortfalls and possible surpluses.
Your business operations might not always be predictable, but knowing the direction of cash inflows and outflows will help in the best treasury management outcomes. You will be in the best position to call in extra funding or credit facilities and when to ship out some funds into worthwhile investments.
When departmental budgets are examined within the confines of a cash flow statement and other financial reports, it is easier to plan for the replacement of machines and expand production capacity.
Financial reports and cash flow
A company’s cash flow statement helps to capture cash flow trends in your business. Your financial reports make it possible to plan for future spending and business growth.
Cash flow analysis and examining the financial reports will help in assessing the spending pattern. This will help you look out for negative and positive variances in your inventory positions for better funding management outcomes.
Timely operational assessments will help you make decisions like ramping up advertisements, introducing discounts, and implementing pricing decisions.
What influences your cash inflow and outflow?
When you bear in mind that cash movement doesn’t happen in isolation in your business, it becomes easier to identify the leading factors that need to be tracked. For many business owners, there is a recurrence of purchases and sales, inventory, receivables, and payables. Each of these transactions affects your cash flow, and they need close monitoring and evaluation.
In the financing segment of your cash flow statement, you will find loans received and repaid, which could have a positive or negative cash flow effect. This could be positive when you receive a new credit line or negative when you pay off an existing loan.
The effect of each factor that impacts your operating, investing, or financing activity in your business can be measured using a cash flow statement. Tracking each of these factors is important for efficient cash flow management.
Vital aspects of cash flow management
- Profits make up an important aspect of your cash flow, and this includes business income as well as income from investments made from time to time. Other incomes banked from sales of assets, investments, and intangible assets are also a part of the mix
- Cash and cash equivalents include deposits made into your bank, term deposits as well as other near-cash items
- Profit is not the same as a cash inflow, although both provide funds to a business or entity. Profit is a form of cash inflow, just like capital generated from sales of stock or conversion of debentures
- Negative cash flow sources such as depreciation, interest payments, debts, and others need to be minimised to attain a positive cash flow position if inflows are not growing favourably
- Regular financial reports will aid in assessing your business cash outflow and help you take the needed steps to achieve your desired positive cash flow.
What are the important headings in a cash flow statement?
Here are some very important headings that you will find in a cash flow statement:
Operating cash flow
The ability of your business to generate the needed cash from normal operations is measured by operating cash flows. When you deduct non-cash expenses from your net income to arrive at an outcome, which, when deducted from the change in working capital, gives you operating cash flow.
Cash flow from financing activities
This is an indicator of the financing mix of your business. It is the net position arrived at from the flow of cash between the business and its shareholders, investors, and creditors.
Cash flow from investing activities
The net cash position after capital expenditure, purchases or sales of investments, open market securities, and mergers & acquisitions is cash flow from investing activities.
When you compare the non-current assets between two balance sheet periods, the difference will also give you the cash flow from investing activities.
Net cash flow
You will arrive at net cash flow when you deduct the cash outflow from the cash inflow for a specified period. It is an indicator of the company’s financial health.
The free cash flow is cash available after the business settles all its financial commitments. It is a key indicator used to assess the capacity for future spending by your business.
In your cash flow analysis, it is also defined as capital expenditure deducted from the operating cash flow.
Cash and cash equivalents
This closing segment of a statement of cash flows shows the net cash flow as well as the opening and closing cash and cash equivalents.
A company’s inflow and outflow are a function of a mix of activities that result from its business operations. To have the benefit of a cash flow statement for important decision-making, the cash flow positions and their variants above need to be computed regularly.
In this regard, adverse cash flow can be spotted early, and steps taken to return the company to positive cash flows.