What is cash flow and why is it important to understand?

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Cash flow. It doesn’t sound exciting, but it’s an incredibly important aspect to plan and understand if you are running a business in 2023 and it's essential that you have a firm grasp on at least the basics. Let's take a dive into the intricacies of cash flow.

What is cash flow?

Well, cash flow in its simplest terms is how much money goes in and out of a business or organisation. Simple as that. It accounts for the money a company receives, spends and accumulates over a given period of time. 

Cash flow is a vital indicator of the financial health of a business and helps you to understand your current and future liquidity needs. As I’m sure you can understand, if you’re an eCommerce brand owner, this is something that you need to have a handle on as it will give you a better understanding of the position of your business and help you to plan spending for future growth.

What is a cash flow statement?

A cash flow statement is a document that provides insight into the flow of money in and out of your business over a particular period of time. This statement is typically used to track financial performance, budgeting, and forecasting. It helps you make informed decisions about how to manage your business's funds and investments. 

Generally speaking, cash flows can be classified into three categories: operating activities, investing activities, and financing activities. Operating activities are associated with generating revenue for the business, such as sales operations or payroll expenses. Investing activities occur when the company invests in something like factories or land. Finally, financing activities happen when a business takes out loans or receives investments from external sources.

By looking at all three categories together on a cash flow statement, companies can analyse their financial situation effectively and make better decisions about where to allocate resources.

It’s also useful for creditors, lenders, investors, government agencies, and others who need to know about a company’s financial situation in order to make informed decisions. By providing a thorough overview of a company's financial situation, a cash flow statement helps all stakeholders better understand your brand's operations.

What is a cash flow forecast and why is it important?

As we know, a cash flow statement tells us how much money came in and out of your business over a certain period of time. A cash flow forecast is an estimate of how much money is going to be travelling in and out of your business over a given period of time in the future.

Understanding the ins and out of your business’s cash flow helps you to make better decisions about how to manage its finances and allocate resources. You can then use this information to assess risk, predict and forecast for future profitability, benchmark performance against competitors and identify opportunities to save some of that hard-earned cash. 

Having a good handle on cash flow enables businesses to spot trends or issues with their financial situation before a disaster. Proper management of cash flow is integral for any brand's success – both long and short-term.

How to run a cash flow forecast

If you need help improving cash flow or putting together a cash flow forecast you can use Wayflyers free cash flow planner here. In some scenarios, our partner Wayflyer might even be able to help you out directly with cash flow issues through their eCommerce financing solutions.

Does cash flow mean profit?

Cash flow vs profit? On the face of it, they sound similar, but are they the same? Well, the answer is no. Although they are both measures of how much money you have, they are fundamentally different. 

As you already know (from reading this expertly crafted article on cash flow), cash flow is a measure of how much money is coming in and out of a business over a certain period of time. But profit is how much you have left from your revenue once you have deducted the costs. Profit will demonstrate the immediate success of your business but cash flow gives you a much better idea of the long-term financial picture.  

What is negative cash flow and how do you manage it?

In its simplest terms, negative cash flow is when a business spends more than it brings in. In most cases, this isn’t actually as bad as it sounds. It’s a normal part of running a business and as long as it’s an isolated incident and managed in the correct way it’s nothing to worry about. 

For instance, a brand might be preparing for a huge sale to acquire new customers, so it would need to procure a much larger amount of stock to account for the new customers it will bring in. This could result in a negative cash flow for that particular month. However, over the course of the year the business may be cash flow positive due to cash stocks that they had built up previous to the sale, or overall profits from the sale as well as customer retention after the sale. 

However, if negative cash flow is sustained month on month throughout the year due to poor investments, low profits, or out-of-the-ordinary financial expenditure -  this is where businesses run into problems. 

If you haven’t yet run into negative cash flow, or you have and want to mitigate it in the future, it would be wise to set up an emergency budget in which you can allocate funds for unexpected expenditures. 

You can also manage negative cash flow by creating cash flow statements and forecasts using the methods above. Having a clear grasp on the numbers, and forecasting for negative cash flow allows you to plan ahead, know where to allocate and cut back spending, and ultimately help guide you’re next steps to get your business out of a negative cash flow cycle.

Cash flow is the lifeblood of any business so it's important to have a good understanding of what it is, how to forecast it and how to manage negative cash flow. 

Get in touch with us if you want to learn more about how we can help you plan and forecast for the future.

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