Cash flow is the amount of cash that comes in and goes out of your company. As year-end approaches, it’s worth checking the health of your company’s cash flow with your accounts department—so you can make sure you’re prepared for any rainy days that might lie ahead.
What is cash flow—and why does it matter?
Cash flow is the money that goes in and out of a business through customers or clients buying your services. It’s typically categorized as cash flows from operations, investing, and financing. Cash received represents inflows, while money spent on expenses like office rent, business loans, credit card payments, or outstanding invoices represents outflows.
Cash flow differs from revenues, which refer to the income earned from selling goods and services. And it’s not the same as profit, which is the sum of money left after you’ve subtracted your company’s expenses from your revenues—and paid off all outstanding obligations.
Your cash flow tells you what’s in the bank, what’s owed to you—and what you owe to others. It also shows when activity in and out is due to happen.
Your cash flow statement is a financial statement that reports where your company gets cash from – cash sources – and where it gets spent – cash usage – over time.
Understanding your cash flow is one of the most crucial financial reporting objectives. In fact, it’s essential to assess your liquidity and overall financial performance.
Positive and negative cashflows
In simple terms, when your cash flow’s positive, it means there’s more money coming into the business than going out. When this is the case, you can settle any outstanding debts, pay your bills on time and in full, and return money to your shareholders.
A positive cash flow can also enable you to think about the future, consider reinvesting in your company’s growth—and provide an invaluable buffer against future financial challenges.
A negative cash flow, on the other hand, can indicate that your liquid assets are decreasing—and you’re spending more money than you’ve got coming in.
And, unless you’re not in debt to anyone and have a negative cash flow because you’re investing in growth, you’ll have to find an alternative source of income to pay off any debts. Not the most comfortable situation to be in.
Boost your business continuity
Having absolute clarity around your business cash flow can help your financial forecasting. Knowing what’s due in and out and when means you can plan for any outstanding debts, understand the timelines involved in repayments and set cash aside for any planned growth initiatives.
Keep an eye on accounts payable
Staying on top of your cash flow and getting a clear picture of your actual financial position demands absolute transparency—which also means understanding your outstanding accounts payable.
Whenever you buy something from a supplier without paying for it at the time of purchase, you make that purchase on credit—and create an account payable. The amount you owe could be payable from your business in anything from 24 hours to 90 days, depending on the supplier’s terms of business.
It’s critical that you track the number of accounts payable you create—and the dates they’re due—so you can make sure you have enough cash in the bank to pay on time.
Watch your average payable period
To get the most out of every dollar, it can help to maximize your trade credit. This way, you get to hold onto your cash for as long as possible while not being late with payments, incurring added charges, or annoying your vendors. The secret is to strike a balance so that you use each dollar to its full potential.
Reduce unnecessary expenditure
Some overheads like staff wages, utility bills, and property rentals are unavoidable when you run a business. But if your cash flow’s starting to look a bit too tight for comfort, it’s worth having a look beneath the surface of your day-to-day expenses to see if there’s anything you can do to ease the strain.
You might be able to negotiate more favorable terms, so you can manage your cash flow with more confidence. Or cancel any recurring software subscriptions you no longer use.
Knowing what’s going out of the business current account and why is a great place to start when considering canceling any outgoings you no longer need.
From your marketing and advertising spend to employee expenses and petty cash—every penny counts when your cash flow’s tight.
Consider your inventory management
Effective inventory management is a sure-fire way to ease the strain on your finances and get some more cash flowing through the business accounts. If you have a warehouse carrying unsold stock, a new sales plan can soon help you clear the decks and create more cash liquidity.
Keep your financial focus
Today’s automated accounting solutions can give you the necessary visibility to stay on top of your cash flow. Automation prevents the stress of misplaced physical records. And it can save you hours on admin tasks like filing and recording paper invoices.
Automating such tasks also reduces the risk of human error during the inputting process. It prevents invoices from going unpaid, avoids late fees, and allows you to control when disbursements happen—removing unnecessary and stressful spikes to your cash flow.
Understanding your sources of cash—and where your money goes each year—is essential to maintaining a financially sustainable business. When your cash flow is clearly visible, it frees you to focus on the bigger picture. You’ll have the data—and the headspace—you need to think about where you want your business to go in the upcoming financial year.
Gain financial resilience
Your accountant or finance department can help you collect and organize all the numbers you need to calculate your year-end cash flow. Understanding how, where, and when money moves through your business creates financial transparency for you and your team.
With a clear picture of your cash in and out, you can easily monitor your revenue and expenditures. And you’ll benefit from your foresight and preparedness with the ability to avoid financial distress and overcome potential financial obstacles with confidence.
Find out how keeping control of your cash flow can help to provide stability in the face of uncertainty and a potential economic downturn.
How to succeed during an economic downturn
Download our latest guide for more guidance on getting ready for year-end.
Hassle-free year-end operations
Sage software is designed to help you streamline your business and prepare for your year-end close with ease. Keep financial focus and stay secure, compliant, innovative, and sustainable. Sage helps your business flow—without costly interruptions.