Keeping track of cash flow is critical for every business owner in every industry. Having a report done every quarter for small business is critical to understand where your money is coming from and going.
What is it? The basic concept is easy to understand. A cash flow is a movement of cash into or out of your business.
Net cash flow = total amount of cash flowing in (minus – ) the total amount of cash flowing out.
Why is it important? Positive cash flow = more cash coming in to your business than cash going out. With positive cash flow, you’ll be able to pay expenses, save for the future, reinvest in your business, return money to shareholders, and settle debts.
A business with negative cash flow is losing cash and might not be able to do those things.
Is negative net cash flow always bad? Not necessarily. Losing money in the short term might be okay if it helps you make money in the long term. A lot of small businesses will have a negative cash flow in the beginning of their start up, even for as long as a year!
Growing companies that are hiring a lot of people or making other investments (such as large purchases of goods or equipment) sometimes have a negative cash flow. That’s not a bad thing if the investments pay off.
When should I worry about a negative net cash flow? With negative cash flow, your company will be limited in its ability to pay for what it needs, settle debts, and invest in the future. Long term negative cash flow typically leads to insolvency. If you want to continue for the long term, you will not want to see negative cash flows for more than a quarter or two. If you continue to see negative cash flows you will want to cut expenses or find new ways of bringing in business.
What’s the difference between net cash flow and net income? Net income is the difference between your revenue and expenses. This includes all money owed to your company, whether or not the payments have actually been received.
Cash flow does not include money owed but not paid to your company.
What are the categories of cash flows? Cash flows are often divided into three categories:
1. Operating cash flows:This is the cash that your business gains or loses in day-to-day operations. Sales and expenses are a a good example.
2. Investing cash flows: This is cash gained or lost on long-term investments that a company has made, such as buying or selling a new plant or equipment, or investments in securities.
3. Financing cash flows: This is cash gained or lost as a result of raising capital and repaying investors and creditors. Your net cash flow from financing activities might be negative if you are servicing debt, retiring debt, or paying cash dividends. If net cash flow in one category is negative, you’ll have to make up for it by generating positive cash flow in another category. For example, if your operational cash flow is negative, you’ll have to generate positive cash flow from investing (e.g. by selling assets) or financing activities (e.g. by taking on new debt)
