Getting Started With the Basics of Cash Flow

Running a business, big or small, involves managing cash flow. Money that comes in to the business flows through it, paying the bills and funding new developments. If that doesn’t happen, then business operations start to falter pretty quickly.

So, because we know how important it is to keep things running smoothly, we’ve put together a beginner’s guide to cash flow 101.

What is cash flow?

Cash flow is the name given to the process of money coming in and going out of a business; income, and expenditure. Managing that process will help make sure that there is always enough money to pay the bills, and keep the business going. Phew!

What is positive cash flow?

Having a positive cash flow means that more money is coming in (income) than is going out (expenditure). This is the best way for a business (or personal finances!) to be.

Using surplus cash in your business

Having a ‘very positive’ cash flow is a nice problem to have. If substantially more money comes in than is spent, especially on a regular basis, then the needs of the business will dictate how that is used.

Extra cash could be reinvested into new equipment or product development in order to grow, as well as having a cash reserve for emergencies or unexpected costs. Business debts with high interest rates could be paid down quicker, or there might be shareholders due a dividend payment.

There are lots of factors to consider

How do I calculate my cash flow?

Working out cash flow with accounting software like Pandle is easy. Just run a cash flow report and our software will produce an easy to understand report so users can monitor exactly how their business is performing.

To calculate it manually, add together all of the income. Then, total all of the expenditure, and subtract that amount from the total income.

A minus number indicates a negative cashflow, meaning more money is going out of the business than is coming in. A positive number shows more money is coming in, than is getting spent.

How do I manage money for a positive cash flow?

 

Get money in to the business

Encouraging customers to pay their bills on time is a big part of cash flow management. Credit control methods might include penalising late payers, or discounting early ones.

Asking for a deposit is more than acceptable in most industries, especially to cover the cost of materials bought before the start of a project. It will also help to protect the business if the client changes their mind!

 

Be efficient with payables

 

If suppliers offer 30 day payment terms, then take consider taking advantage of that fact where appropriate. If there is a discount available for earlier payment, then that might be more efficient if it means paying less money out in the long run.

Pandle is refreshingly simple bookkeeping software. Learn more here>