Why is cash flow important?

Did you know that issues with cash flow ranked in three of the top 20 reasons why startup businesses failed in a study by CB Insights in 2019? Read on to find out how to protect yourself from this business risk.

In this article, we’ll discuss: 

• What is cash flow?
• Different types of cash flow
• Why cash flow is important
• Tips for staying cash flow positive
• How Countingup can help you manage your cash flow

Whether you’re a sole trader or you’ve just launched an exciting new small business venture, read on to discover how Countingup can help you manage your cash flow, so you stay in the green.

Cash flow refers to the money that flows through your business in a given period (typically monthly or annually). Your cash flow includes business inflows (sources of income) and outflows (sources of expenses and costs). Both are important to keep track of because each impact your business in fundamentally different ways. 

Unlike revenue (which measures money you’ve earned), cash flow measures your money as you have it. Therefore, because it doesn’t take into account whether your customer has paid yet, it can be a misleading indicator of your business’ performance.

Cash flow doesn’t always have to refer to cash or money specifically, as it can sometimes refer to the movement of cash equivalents (like valuable liquid assets and government bonds). Depending on your business, being able to look at different income sources or costs can help you finance your business with more clarity and flexibility in the long term.

Regardless of your business type, you’ll likely have core costs that need managing. So far, we’ve talked about cash flow as a single entity, but different flows of cash can be categorised in different ways. 

Depending on your business, you might become more familiar with some types of cash flow than others. Here’s an overview to help you get a better idea of how to manage your business’ cash flow. 

• Cash Flows from Operations (or CFO) describes the cash flow as a result of your business’ day-to-day: the production and sale of goods and/or services from ordinary operations. You can calculate your business’ operating cash flow by subtracting your operating expenses from your revenue.

• Cash Flows from Investing (or CFI) describes the cash you’ve lost or made from your business’ investments in a given period like buying or selling stocks, securities, or some types of assets. You can calculate your business’ investing cash flows by subtracting the sale of your assets from any further investments you make.

• Cash flows from Financing (or CFF) describes the cash you have in capital versus the cash you owe. Cash flows from financing include issuing or acquiring debt or equity, and paying dividends. This figure is important because it can allow investors to see how well you manage your company’s structure and debts. You can calculate your business’ financing cash flows by subtracting cash made from debt and equity from the cash you owe as dividends or as debt.

While your business’ profit and revenue are key figures to know, cash flow tells the other side of your story. Cash flow shows you where you’ve increased sales, where you can cut costs, and how flexible your business is to any changes. 

That’s why cash flow is important: it’s a marker of your business’ health. Having a well-documented and positive cash flow will be essential as you seek decisions from investors or lenders to help you grow your business.

With so much going on as you set up and run a business, managing cash flow early can be useful. Cash flow allows you to spot any changes that show areas for growth and saving. 

Here are a few tips to help you keep your cash flow positive, and reduce the negative elements costing you money. 

1. Your cash can’t flow if you don’t have any: maintain some cash reserves to protect yourself. Unexpected expenses or dry spells in sales will inevitably come. Having some liquid cash in the bank means you can afford different approaches to marketing or customer acquisition to get you back to earning money – keeping your cash flow positive.
2. Keep track of income and expenses as best you can. You won’t be able to identify areas to save money or invest more in if you can’t see your numbers. When starting a business, having an overview of your progress is important because it informs your growth and how to maximise it. 
3. Prioritise your cash flow: by giving discounts for early payments, or charging fees for late ones, you can help make sure your cash flow becomes a priority for your customers as well as you. 
4. Cut your costs: minimising your outgoings is key in improving your cash flow, whether it’s by renegotiating the rent on your premises, switching to cheaper packaging, or increasing production efficiency. Cutting costs can also give you more breathing room when margins become tight.
5. Increase your prices. While this can be a risky option, testing your customer base with reasonable increases in prices can help your business survive in the short term and grow in the long term.

Countingup makes managing your business easier. With your business current account and accounting software in one app, we automated the time-consuming aspects of your financial admin. Instead, you can focus on doing what you love and do best.

Find out more about our competitive pricing for business owners here, or download the Countingup app from the App Store or Google Play Store and sign up free.