Picture the scene. You’ve started your journey as a freelancer or a small business owner. The business has started to pick up, and you have income coming from new and returning clients. You also have expenses like office rent, licences, stock refill, and taxes you need to pay.

This stream of money flowing in and out of your business is your cash flow. The cash you receive is called inflows, and the money you spend is outflows.

What is the role of cash flow in your business?

Generating positive cash flow is the goal of every business. Positive cash flow means your company’s liquid assets (cash, savings, investments) increase so you can pay back shareholders, pay expenses, and create a buffer against future financial challenges.

If you consistently generate a positive net cash flow (where your liquid assets are increasing), your business has a greater chance of succeeding without relying on funding or investments. On the other hand, a sustained negative cash flow means you’ll likely struggle to make ends meet in the future.

The better your liquidity and overall financial performance, the more protected you’ll be if your company takes a sudden downturn. A good example of this was during the global pandemic. Companies that had a better cash flow were much better placed to manage the uncertain times.

Preparing a cash flow forecast will help you organise your finances to increase your chances of weathering unexpected financial storms and generate positive cash flow.

Cash flow forecast definition

By definition, a cash flow forecast estimates your inflow and outflow of cash during a specific time, including projected income and expenses. Cash flow forecasts typically cover the next financial year. Although, you can also use cash flow forecasts for the next quarter, month or even week.

What are the different cash flow categories?

Your cash flow typically falls within these categories:

Cash flows from operations (CFO)

Your CFO describes the money you make from your business operations. CFO indicates if you have enough funds coming in to pay your bills and expenses. Your operating cash inflows must exceed your outflows for the company to be financially viable long-term. 

CFO also helps divide the cash you receive from sales to determine whether it counts as revenue (money you make from sales only) or cash flow. For example, making a massive sale from one client will boost your revenue and earnings. However, the extra money doesn’t necessarily improve cash flow if you have difficulty collecting the money from your customer. In this case, the sale could have a negative impact on your CFO. 

Cash flows from investing (CFI)

CFI reports how much investment-related funds you’ve generated or spent during a specific time. For example, if you’ve bought speculative assets like new property, invested in stocks or bonds, or sold any assets or investments. 

When it comes to CFO, negative cash flow doesn’t have to be cause for concern. For example, if you invest a significant amount in your brand’s long-term health, like research and development, negative cash flow isn’t necessarily a warning sign. 

Cash flows from financing (CFF)

If your company needs financial backup, CFF presents the net cash flows used to fund its capital, like transactions involving issuing debt, equity, and paying dividends

Financing cash flow offers investors insight into your company’s financial strength and how well you manage your capital structure. Frequently turning to new debt or equity for cash may show positive cash flow from financing activities. Still, relying on loans to grow your business could be a sign for investors that it doesn’t generate enough earnings.

What is a statement of cash flows?

The cash flow statement is a critical part of financial statements, alongside the balance sheet and the income statement. A balance sheet provides a one-time snapshot of your assets and liabilities, while an income statement indicates your profitability over a certain time period.

Your cash flow statement then serves as a corporate cheque book that reconciles the other two accounts and shows whether you’ve collected the revenue listed in your income statement.

What is net cash flow?

Your net cash flow represents how much your business made in a set period after subtracting the total amount of money spent during the same period. Calculating your net cash flow is key to measuring your business’s ability to survive and grow. 

Your net cash flow generally includes:

  • Cash flows from operations (CFO)
  • Cash flows from investments (CFI)
  • Cash flows from financing (CFF)

How to calculate net cash flow

Here’s how to work out your net cash flow:

Net cash flow = Net cash flow from operations + Net cash flow from investments + Net cash flow from financing

Or to simplify it further:

Net cash flow = Total cash inflows – Total cash outflows

How do these calculations work in real life? 

Imagine your company has a net cash flow from operating activities of £50,000 for a year and £20,000 from financing. Your company also lost money from investments, resulting in -£10,000 net cash flow. What is the net cash flow? 

50,000 + 20,000 – 10,000 = 60,000

This means your business’s net cash flow over the given period is £60,000. 

Learning how to calculate net cash flow helps you determine how much cash your business generates and if your flows are positive or negative. You’ll gain valuable insight into your short-term financial viability.

Manage your cash flow with Countingup

Managing your cash flow can be done easily with the right system. Tools like Countingup provide real-time insights into your business finances and cash flow management. Receive profit and loss reports, tax estimates and unpaid invoices to keep your business going like clockwork. Find out more here.