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What Is Cash Flow?: A Guide for Small Businesses

Kyle Delicata, Relationship Manager, First Republic Bank
December 7, 2021

Running a small business requires a significant amount of money flowing in and out of your company. This means that it’s critical for you to have enough funds to cover short- and long-term expenses at any given time, even though that can be a significant challenge. Your cash flow helps you determine how much comes in and goes out over a given period of time. 

Knowing what your cash flow is can help you predict: when your business’s liquidity will be low, when your money comes in or out and what kind of cash inflows and cash outflows you have. Whether your business has positive or negative cash flow, knowing exactly what cash flow is can help you make the most informed business decisions possible — and even help identify ways to reduce costs and get paid faster.

What is cash flow?

You may have heard the term cash flow before, and you’d be forgiven if you’re not entirely sure what it is or how it factors into 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, but most businesses employ a cash flow management system, tracking cash flow weekly, at a minimum.

Businesses can have positive or negative cash flow. Positive cash flow means there’s more money coming into the company than going out, while negative cash flow means that more money is leaving the company than coming in. Cash flow is different from net income, which is solely the profit a company has earned for a specific period of time.

Bear in mind that either kind of cash flow can be temporary: operating at a loss may not necessarily be due to negative cash flow. This simply means that 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. These consist of operating, investing and financing: 

  • 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. It allows the business to know exactly how much cash is on hand, when money will be coming and going through the company and where to find opportunities to invest in the company during times of positive cash flow.

Understanding and overseeing your company’s cash flow — or cash flow management — is essential to your success. It helps you understand the amount of cash your business has on hand, how much is going out the door and whether or not you can cover your expenses, such as overhead and payroll.

Tracking cash flow also enables you to identify opportunities when you have enough cash on hand to make investments in your business, such as renovation or expansion, which can ultimately boost margins, increase profits or open up additional revenue streams.

Cash flow statements

A cash flow statement helps you look at your incoming and outgoing cash at a glance. Whether you’re tracking cash flow weekly or monthly, you’ll want to keep a log of cash flow statements so you can look at short- and long-term trends. Without them, you’ll have a tough time keeping track of whether your cash flow is positive or negative. 

You should examine your cash flow statements as you would with any other financial documents, such as a balance sheet or income statement. A series of cash flow statements can help uncover patterns, unnecessary expenditures or changes to invoicing terms that could help you keep cash flow more consistent.

How to manage your cash flow

Cash flow isn’t something beyond your control as a business owner. You have a significant amount of direction in terms of when you receive income and pay bills, which savvy business owners should use to their advantage. 

There are several ways to manage your cash flow. The first is to determine if your payment terms are working to your advantage. Consider offering clients different invoice payment terms; some could be on a 30-day term while others may be on a 60- or 90-day payment schedule. Staggering your payment terms can help you normalize your cash flow, but keep in mind that this works most efficiently when clients are able to pay on time.

If you find that you have one or more clients who have a pattern of paying late, consider what steps you can take to prevent overdue payments from them. This is a common challenge for maintaining even cash flow over time, and it can be a straightforward fix.

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 audit your expenditures often 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, it may be worth 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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