You’ve probably stumbled across the term “cash flow” in the financial world, but when it comes to running a small business, it’s vital to know more than how to use it in a sentence.
Cash flow, or the movement of liquid funds in and out of your business, holds the answer to the question, “How’s business?” To track your cash flow is to know that answer at all times, which will help you pinpoint ways you can increase revenue and save money. So before you slip “cash flow” into a conversation over canapés again, let’s brush up on this important financial concept.
There are two types of cash flow – cash inflow and cash outflow. Cash inflow, simply enough, is the flow of cash into your business, while cash outflow is (you guessed it!) the flow of cash out of your business.
When you have more cash inflow than outflow, it can be referred to as “positive” cash flow. Your business is raking in the revenue! But when the cash outflow is greater, it’s referred to as “negative” cash flow; you owe more than you’re making. It’s common for businesses to experience both seasons of positive and negative cash flow, but what separates great businesses from the rest is the dedication to tracking the ups and downs, and looking for ways to plug any holes in the cash outflow.
Now that you know the difference between positive and negative cash flow, it’s imperative to recognise from where the cash flow originates. The three main categories are as follows:
– Operating: The main source of cash flow, operating is comprised of all income and expenses from selling a service or product. Accounts payable and receivable, cash from sales, payroll costs, paid taxes, and any depreciation of physical assets are all included in this category.
– Investing: This category includes any cash flow from stocks, securities or fixed assets. Does the business rent space to another company and thus bring in payment each month? Do they earn dividends from shares?
– Finance: Finance activities refer to any outstanding, long-term debt the company holds, as well as the cash amount the business is required to pay stockholders who earn dividends.
As cash flow hinges upon those three categories, it’s critical for any small business owner to regularly review these areas and make necessary adjustments in order to improve cash flow.
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