Cash Flow Defined

Cash flow consists of inflows (cash coming in to the company) minus your outflows (cash going out the company). Examples for Inflows include cash on hand, cash sales, cash received from Accounts Receivable, sale of assets, and new investment injected into company.  It is important to note that accounts receivable is not specifically a cash inflow since that cash has not yet been received and isn’t available to be spent today. On the other hand, cash outflows can be represented by cash spending, payment to suppliers, principal repayment, and purchase of assets.  In this article, we will explore more on improving cash flow in your business.


Improving Cash Flow by Using a Cash Flow Forecast 

When forecasting cash flow, it is best to forecast over one year. Start by gathering as much data as you can about your upcoming sales as well as costs to implement into your cash flow forecast. You can either use a simple excel spreadsheet or use specialised software to help with the process.

By understanding your Daily Sales Outstanding, you can better predict the time it will take to receive payment from your debtors. Your cash flow forecast should focus on inflow and outflow timing making sure there are no shortfalls in the forecasted time horizon.

Most importantly, be honest with your projections because if you overestimate your sales and fail to reach the projected sales figure, then you could potentially run into a cash shortfall.

Also, be sure to adjust for seasonality in your cash flow projection, since it is common for SME’s to require more working capital during the holiday period.

More working capital is necessary to fuel the larger production cost associated with higher demand. You can quench the need of working capital in this time by selling outstanding invoices with InvoiceInterchange to free up working capital if you find yourself in a cash crunch.


Analysing Your Cash Flow Statement 

Frequently overlooked, the cash flow statement measures the sources and uses of cash in a specific period of time. Essentially it shows if the company can pay it’s bills, usually over a one month period. It does not include non cash accounting such as  depreciation and amortisation. It focus solely on capturing increases and decreases in accounts receivable and accounts payable. The cash flow statement is a better measure of company performance than the income statement because it only measures free cash flow and ignores any non cash items.

You must ask yourself two key questions when analysing your company’s cash flow statement:

  • Did my net cash flow increase or decrease compared to last year?
  • Where did I spend cash on? Operations, investment or financing?
  • How can I optimise my cash spending ?

By answering these questions you can better track where your money is going.


Remember the Golden Rule of Working Capital: Profits can’t pay the bills, it’s just an accounting term. Your business sustains on cash flow.   Get start on improving cash flow for your business by applying some of the recommendations above now.



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