What Is Cash Flow? A Guide for Small Businesses

First Republic Bank
December 7, 2021

  • Cash flow provides insight into cash going in and out of a business.
  • Monitoring cash flow can help business owners make savvy financial decisions.
  • Businesses can manage their cash flow to potentially increase profit.

A significant amount of money moves in and out of your company when running a small business. It’s critical to have enough funds on hand to cover short- and long-term expenses, though that can be a significant challenge at times. One way to understand your business’s net balance is by looking at cash flow. Monitoring cash flow helps you determine how much comes in and goes out over a given period of time.

Calculating your cash flow can help you predict when your business’s liquidity will be low, as well as the typical timing and amount of cash inflows and outflows. Whether your business has positive or negative cash flow, knowing exactly what your cash flow is can help you make informed and profitable business decisions.

Cash flow meaning

While you may have heard the term cash flow, you may not fully understand the impact it could have on your business decisions. Cash flow is the amount of money moving in and out of a company during a set period of time. This time period is for you to decide. Most businesses employ a cash flow management system, and track cash flow weekly, at a minimum. Cash flow is different from net income, which is solely the profit a company has earned for a specific period of time.

Businesses can have positive or negative cash flow.

Positive cash flow means there’s more money coming into the company than going out, and negative cash flow means there’s more money leaving the company than coming in.

Bear in mind that either kind of cash flow can be temporary and operating at a loss may not necessarily be due to negative cash flow. This simply means the amount of money you’re spending is higher than what’s being brought in during the period you’re tracking.

Types of cash flow

There are a few different types of cash flow worth tracking, including:

  • Cash flow from operations: This is cash generated from your primary business activities and is often the biggest source of cash for most businesses.
  • Cash flow from investments: This is cash generated from your business’s various investments, whether that's equipment, investments or property.
  • Cash flow from financing: This is cash moved between a company and its investors, as well as its creditors. These financing activities usually include debt, equity or dividend payments, depending on the source of the money.

Why is cash flow important to a small business?

Cash flow is crucial to the success of a small business because it provides important information about financial health.

Cash flow management allows you to understand and oversee your company’s cash flow to:

  • Better understand how much cash is on hand
  • Predict the frequency and amount of money moving in and out
  • Determine if you can cover essential expenses such as overhead costs and payroll
  • Pinpoint investment opportunities during times of positive cash flow
  • Identify opportunities for growth, such as through renovations or expansion

All of these benefits can ultimately boost margins, increase profits, open up additional revenue streams and help you make other financially savvy business decisions.

Using cash flow statements

A cash flow statement provides an at-a-glance view of incoming and outgoing cash. It’s also a helpful tool for tracking and documentation purposes. Whether you’re tracking cash flow weekly or monthly, you’ll want to keep a log of cash flow statements when bookkeeping and prioritize them as you would a balance sheet, income statement or other financial documents.

A series of cash flow statements can help uncover short- and long-term patterns, unnecessary expenditures or changes to invoicing terms that could help you keep cash flow more consistent and capitalize on investment opportunities.

How to manage your cash flow

Cash flow is something you can influence and use to develop business success strategies. There are several such ways to manage your cash flow.

The first method is to determine if your payment terms are working to your advantage. Consider offering clients different invoice payment terms (such as 30-day, 60-day or 90-day terms). Staggering your payment terms can help you normalize your cash flow, as long as payments are made on time. If some clients often pay late, consider steps to avoid overdue payments, as this can help maintain a more consistent cash flow.

You can also take steps internally to maintain a healthy, positive cash flow. Keep track of your inventory to make sure estimates are accurate and clear, and work on payment terms with vendors so that you can manage inflows and outflows every month. It’s also helpful to frequently audit your expenditures and weed out unnecessary purchases.

Managing cash flow with a small business line of credit

Should you and your business still encounter cash flow challenges, you may want to consider opening a business line of credit. A business line of credit offers you a certain amount of money from which you can borrow over a set period of time. You only have to pay interest on the money you’ve pulled from your business line of credit, which can help you cover short-term negative cash flows.

If a business line of credit sounds like an appealing option to help you make your cash flow more consistent, it’s important to partner with the right kind of financial institution. First Republic Bank specializes in business lines of credit for this and other purposes. Our team of small business banking experts can walk you through your options, as well as your ambitions for long-term growth.

There are a variety of small business loans out there; finding the right one for your needs is often the real challenge. First Republic Bank can help you decide what’s right for you over the short and long term.

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