18 March 2025
Table of contents
Table of contents
Running a business, big or small, involves managing cash flow. It helps you pay bills on time, take advantage of opportunities, and minimise your own stress levels (or at least try). As it’s one of The Very Important Things of self-employment, we’ve put together this beginner’s guide to cash flow.
Cash flow describes the movement of money coming in and going out of a business. The information is usually laid out on a cash flow statement showing how money enters and leaves the business in a specific period of time. The timing of it is very important, because it will help you work out if there enough cash available to pay for everything when you’re supposed to. Looking at it alongside your other financial reports can help you run your business more efficiently.
Cash flow forecasting takes information about the payments and sales you expect to happen, and uses it to predict your cash flow in the future. This could be based on things like sales to customers, loans (and then the subsequent repayments), the wages you need to pay your employees, and so on.
You need to invest in the business by purchasing a new machine which will help you generate more sales. The business asks the bank for a loan to help finance the new machine. The money you borrow comes into the business, but only temporarily because you then use it to make your purchase. The average sales figures increase as a result of the new machine, but you need to account for the loan repayments you agreed to make over the next six months.
Recording all these transactions in your accounts will help you predict the financial health of your business with more accuracy, so you can take steps to protect it and make more effective decisions.
A forecast is just that: a forecast. It’s usually more reliable than guesswork because it’s based on actual data, but the reality might happen to disrupt your plans, like something breaking or sales going a bit quieter than you expected. Your cash flow statement or forecast can help you create a budget with a bit of wiggle room (this isn’t strictly technical accounting jargon) so you can anticipate how to deal with problems before you actually know what they’re going to be.
Having a positive cash flow means that more money is coming in (income) than is going out (expenditure) during the same period of time. This is the best way for a business to be, because it means you should have enough cash coming in to cover what’s going out. Negative cash flow means your expecting more money to leave the business than you think will enter it.
It’s not a great feeling, especially if you’re not sure how you’re going to cover the difference, but knowing about it in advance at least gives you a chance to do something to help.
While some things, like unexpected bills, are down to luck, there are things you can do to improve cash flow.
Encouraging customers to pay their bills on time is a big part of cash flow management – especially if you don’t have a lot of spare cash hanging around. There are lots of things you can put in place, including sending payment reminders before the invoice is even overdue.
You might offer discounts to early payers, slap penalties on the late ones, ask for a deposit, or even upfront or milestone payments. Some businesses will ask for payment to cover the cost of materials needed for a project, and then invoice for everything else once the job’s finished.
Sending in Big Barry to look threatening is optional, but not something we can endorse. We can recommend using the automated payment reminders in Pandle, though. In fact we should recommend this, because it’s what our boss pays us for.
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. It all depends on what will be most useful to you.
Having a ‘very positive’ cash flow is a nice problem to have. If substantially more money comes in than goes out, especially on a regular basis, then the needs of the business will dictate how it could be used.
Extra cash could be reinvested into new equipment or product development in order to grow. You could build up a cash reserve for emergencies or unexpected costs. Debts with high interest rates could be paid down quicker, making things cheaper for you in the long-term. There might be shareholders due a dividend payment. It all depends on your particular business, but monitoring your cash flow will at least help you decide!
Working out cash flow with usually very easy with accounting software (like Pandle!) because most of the good ones include a reporting function. It will take the bookkeeping data you enter, and turn it into a cash flow statement or forecast in a (hopefully) a few clicks.
To calculate it manually, add together all of the income. Then add together all the expenditure over the same period of time, and subtract that amount from the total income.
A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible.
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