A Simple Guide to Cash Flow Statements

How to manage your business cash flow.

Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.

Whether you are just starting out or your business is booming, managing cash flow effectively is important for survival. Statistics show us that more than 60 percent of businesses that go bust are actually profitable – but, they have simply run out of cash.

In this guide, we will demonstrate how cash flow statements can help you keep track of your business finances, as well as ways to create a cash flow analysis. So, read on to find out more.

What is cash flow?

Cash flow is all the money moving in and out of your operation, and 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 successfully manage your cash flow, your business won’t survive.

Cash flow is a pitfall which commonly grows with time and can lure entrepreneurs into a false sense of security. So while 91% of small businesses enjoy relative success within their first year of trading, cash flow is one of the major reasons they may not survive to see their fifth.

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.
The statement can be broken down into three main components:

  • Cash from operating activities – this covers any money that goes towards the running of your business and is generated from sales of your products or services. For example, sales receipts, supplier costs, interest payments, employee wages, rent payments and more.

  • Cash from investing activities – you’ll usually have to include cash from investing in your cash flow statement if you’ve purchased or sold an asset, such as equipment, buildings or a loan.

  • Cash from financing activities – this tends to include any money your business receives from investors or banks, as well as loan repayments and shareholder dividends.

Unlike a balance sheet or income statement, your cash flow statement does not include any future credit – whether that’s outgoing or incoming. So, it should always be looked at alongside these additional records.

You can use a cash flow statement to check that your company is making enough money to pay off any debts or loans (financing activities) and fund your day-to-day operations (operating activities). If you have any potential or existing investors in your business, they can also use it to check your company – and their investment – is financially secure.

Positive cash flow, net cash flow and liquidity

Positive cash flow takes place when the cash inflows over a certain period of time 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 your business’s operating activities. 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, 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 cash flow statements. If there’s an increase in your cash reserves, in all likelihood things are going well and your business is healthy.

If your cash analysis suggests that your reserves are declining, you might find it 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, to reassess and resolve whatever issue is causing a cash shortfall.

How can I improve my business cash flow?

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

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.

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 and analysis.

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. You can then return to this plan when conducting your cash flow analysis, to check what major expenses may have impacted your inflows or outflows that month.

Assess your expenses. Review your costs regularly and use accounting software to create profit and loss reports. Xero is the perfect tool, offering a cloud-based accounting platform that integrates 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.

Look at how you’re spending and receiving cash. Weighing up the benefits of accepting alternate payment methods — such as credit cards — may also enable your debtors to settle outstanding bills faster.

Manage your business cash flow with Square Instant Transfers

Regular money deposits are an essential part of managing your cash flow, so it’s vital that you have a quick and easy-to-use transfer tool.

With Square Instant Transfers, you can move any money from sales straight to your bank account with one easy tap – and it will be in your account faster than the next working day. This ensures your incoming cash is ready and available to use when you need it, so you can cover your various business operations, investments and financing activities.

Frequently asked questions

  • Why are cash flow statements important to businesses?

    Cash flow is the money that moves in and out of a business. Staying on top of your cash flow is a vital part of running a successful business – and an accurate cash flow statement is a key tool for achieving this. You can use your cash flow statement to make sure your business has enough money coming in to pay off any debts and to fund day-to-day running expenses.

  • How often should you do a cash flow analysis?

    As a general rule of thumb, a rolling monthly cash flow statement should help you stay in control of your business’ performance. Ideally, you’d also have an idea of what your cash flow will look like over the next 12 months. That way, you can anticipate any potential problems and quickly nip them in the bud.

  • How can you solve cash flow problems?

    The solution to your cash flow problems will vary depending on what the exact sticking point is. There are some early warning signs you can look out for so you’re not surprised by cash flow problems. These warning signs include: relying too heavily on one particular client, lots of short-term debt and too much stock combined with flagging sales.

    To keep cash flowing in, you should send your invoices out quickly and with clear deadlines for payment. Use Square’s online invoicing tools to instantly send invoices and monitor payments. This makes it easy to keep track of what’s been paid and what’s still outstanding.

    Keep the customer’s journey as smooth as possible and ensure there are no sticking points standing in the way of accepting payment, whether through your online store or a physical point-of-sale.

  • What are the three types of cash flow?

    Cash flow from operating activities describes funds that contribute to the running of your business. These come from sales you’ve made. Cash from investing activities is the money spent on assets, such as equipment or loans. Finally, cash from financing activities covers money received from investors and banks.

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