Cash Flow Statements and Analysis: Learn How Cash Flow Affects Your Business

“Never take your eyes off the cash flow,” says Richard Branson, founder of the Virgin Group, “because it’s the lifeblood of your business.” Whether your business is struggling or booming, managing cash flow effectively is important for survival — statistics show us that over 60 percent of businesses that go bust are profitable but have simply run out of cash. Our guide can help you understand how cash flow affects your business.

What is cash flow?

Cash flow is all the money moving into and out of your operation. Managing it is one of the most important elements of running your small business. Put simply, it doesn’t matter how great your idea is, how meticulously you’ve worked on your business plan or how brilliant your product is, if you can’t manage your cash flow, your business won’t survive.

In fact, a recent report into corporate insolvencies by the Australian Securities and Investments Commission (ASIC) found that 44 percent of businesses fail because of inadequate cash flow or high cash use.

What is a cash flow statement?

A cash flow statement is one of the most valuable tools for managing your business effectively. It allows you to track all the money flowing in and out of your business over a set period of time.

For a cash flow template and a more detailed breakdown of what to include, the Department of Industry, Innovation and Science’s website is an excellent resource.

Positive cash flow, net cash flow and liquidity

Positive cash flow takes place when the cash inflows over a certain period are higher than the outflows. This shouldn’t, however, be confused with profit. Essentially, positive cash flow indicates that your business’s liquid assets are increasing, which gives you an opportunity to settle outstanding debts and reinvest in the business. It also gives you a buffer against any future financial challenges. Positive cash flow is almost always the result of careful financial management. In other words, it’s not something you should leave to chance.

Net cash flow is the amount of cash generated and lost over a specific period of time. It’s one of the most important tools for assessing your business’s ability to generate cash and, therefore, its viability. For that reason, it’s the most important figure on your cash flow statement.

If you have lots of liquid assets — cash or assets that you can quickly convert to cash if need be — then you have liquidity. Conversely, if your money is tied up in assets that you can’t sell quickly, like highly specialised machinery, for example, that might leave you with little available cash. This is where your cash flow statement proves invaluable; it helps you measure your liquidity.

What is operational cash flow?

Operational cash flow is the amount of cash generated by your normal business operations. To arrive at this number, you subtract your operating expenses from your revenue. The operational cash flow lets you know whether your business can generate enough positive cash flow to survive and grow without seeking external financing.

Cash flow analysis

A cash flow analysis allows you to assess your business’s financial health. Essentially, it’s a close study of the movement of cash in and out of your business, which helps you determine certain cash flow patterns.

This is where your cash flow statement — and that net cash flow number — come in handy. Compare the figure with previous statements. If there’s an increase in your cash reserves, then in all likelihood things are going well and your business is healthy. If your cash reserves are declining, then you might find it’s hard to pay off debts and you may find yourself becoming increasingly reliant on credit. If this is the case, you might need to revisit your business plan, reassess and resolve whatever issue is causing a cash shortfall.

How can I improve my business cash flow?

Here are six tips to help improve the cash flow in your small business:

  1. Invoice quickly and set clear payment terms. The sooner you send an invoice, the faster you get paid. Make sure you set clear terms on your invoice, as research shows that many invoices are paid an average of two weeks late. If you want to get paid within a month, try setting your terms of payment at 13 days or fewer.

  2. Encourage face-to-face payments. If your customers are making payment on-the-spot, not only are you saving time that you would usually spend issuing invoices, but you are improving your cash flow at the same time. Mobile payments tools like Square Reader for contactless and chip are designed to get you paid fast, no matter where your business takes you. Simple pricing and no monthly fees means you’re only charged when you accept a payment.

  3. Use e-invoicing tools. E-invoicing (also known as online invoicing) with software such as Square Invoices enables you to send invoices directly from your computer or point-of-sale app. You can then monitor the payment status so you can always see what’s outstanding — an essential part of cash flow management.

  4. Create a long-term financial plan. A plan can help you track money coming in and going out, and it can bring a clear understanding of what expenses are due soon so you can forecast how to cover them.

  5. Assess your expenses. Review your costs regularly, and use accounting software to create profit and loss reports. Xero or QuickBooks Online are two cloud-based accounting platforms that integrate with Square. Your accountant or financial advisor should also be able to help you interpret these reports and make decisions based upon what they’re telling you.

  6. Look at how you’re spending and receiving cash. Be creative about ways to save money; for example, some business transactions could be processed for bartered goods or services where both parties can benefit. Weighing the benefits of accepting alternate payment methods — such as credit cards — may also enable your debtors to settle outstanding bills faster.

This is part two of our Business Plan series. Part one is about business operations.

Related Articles: