What is Cash Flow?

From startup and everyday operating costs to growth and expansion costs, cash is the lifeblood of a business. Large corporate organizations and small business alike are required to make decisions about where and when to spend (or not to spend) money. To do this, it’s imperative that you monitor what is commonly referred to as “cash flow.”

What is cash flow? Put simply, cash flow is the journey of dollars into and out of your business. Things like the sale of items and services, lines of credit, loans, or the sale of any assets can all be considered an “inflow” of cash. Business expenditures (payroll, utilities, mortgage, or rental fees), business purchases (equipment or supplies), or loan repayments can all be considered “outflow.”

Sounds easy enough, right? While the concept is fairly straightforward, how to make sense of it and create short- and long- term strategies from it can seem daunting. This is especially true for new small business owners who are often strapped for finances and need to make the most of their cash flow.

For that reason, it’s imperative that you create a cash flow statement to help you gather information about revenue and expenses over a period of time. Preparing a cash flow statement, or cash flow analysis, will help you keep tabs on your finances and effectively plan, whether for the next quarter or for the year ahead.

Creating a Cash Flow Statement

If you understand the basic principles of balancing a checkbook, you’ll understand some of the basic principles behind developing a cash flow statement. Ideally, you will look at the change in cash (actual cash or cash equivalents) over a specific period of time.

One of the primary reasons to create a cash flow statement is to gain insight into your spending and expenses by documenting and keeping a history of cash flow on a monthly or quarterly basis. To do this, you will need to include a cash flow analysis regarding the following information:

  • Cash Flow from Operations
    Much like the title suggests, this part of a cash flow analysis comes from the regular ebb and flow of your business and focuses on the net income (revenue minus the costs of goods, expenses, taxes, etc.). Also included in this portion of your cash flow analysis should be non-cash expenses such as depreciation, adjustments made for losses or gains, and changes in all of your current assets and liabilities. Consider operations cash flow as the money that is generated internally.
  • Cash Flow from Financing
    The financial portion of your cash flow statement includes items like loan or credit line obligations (repayment from borrowing money), issuing or buying back stock, and any cash dividends. Eventually, your cash flow analysis will help you determine the impact (positive or negative) of your financial actions. This will help you make more informed decisions in the months, quarters, and years to come.
  • Cash Flow from Investing
    In many ways, your business is one giant investment, but in this particular case, we’re referring to non-current assets. These are assets that will add value to your company over time, whose value can’t be fully realized during the current cash flow statement.When you think about what to include in the investment cash flow portion of your statement, consider things like marketing and brand recognition expenses, purchases of equipment or intellectual property, or any goodwill efforts you’ve made.

By including the three breakdowns above, you’ll be able to create a complete picture of your financial standings. Regular cash flow analysis is a vital part of staying in touch with your business and determining your next course of action.

Some information on this page is adapted from content that originally appeared on Nav.com, a Venturize supporter.

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