Have you tracked your business money and how they are coming in and out? Cash flow is the flow of cash. For individuals, moving cash in and out of their pockets is known as cash flow. Moving cash in and out of a bank account is known as cash flow for businesses. Let's learn what cash flow is and how to calculate cash flow.
Cash flow is the cash movement from individuals or businesses for a specific period. The money is either coming in or coming out.
Cash inflow means the money is coming in. Cash outflow means the money is coming out. The money is either increasing or decreasing.
An individual or company can have a positive or negative cash flow. Positive cash flow occurs if cash inflow exceeds cash outflow. Negative cash flow means cash outflow surpasses cash inflow.
Three types of cash flow are primarily available. They are given below:
Operating cash flow is the net cash you generate from a business's regular operational activities. Examples of operating cash flow are collecting money from customers, providing salaries to employees, providing cash to suppliers, etc.
Investing cash flow is the money a business spends or receives from investment-related activities for a particular timeframe. Examples of investing cash flow are buying or selling a property or equipment, purchasing or selling off stocks, bonds, or securities, etc.
Financing cash flow is the net funding from financing activities for a particular timeframe. Examples of financing cash flow are issuing new stock, paying loans and dividends to shareholders, etc.
The net cash flow formula is total cash inflows minus total cash outflows.
For example, you have a laundry business. You earned $6,000 in September and spent $4,000 to run your business.
Hence, your net cash flow is $2,000 ($6,000-$4,000).
Many people think cash flow and profit are the same. But, they are not. Profits are documented on a company's income statement. In contrast, cash flow is reported separately on a company's cash flow statement.
For instance, a business may look highly profitable as it has earned a considerable profit in a particular period. But it sold their product on credit and failed to collect the unpaid cash for long. This will cause a poor cash flow.
The following are key ways to improve your business cash flow.
Increase your sales by selling more products and giving discounts. Give additional discounts to customers who pay money quickly.
Look for new ways to reduce operating costs. Avoid excessive inventory. Cut down unnecessary expenses.
Continuously track down your income and expenses. Note down even the smallest transactions incurred in cash.
Regardless of your business type, understanding and managing cash flow appropriately helps you make a balance. Whether it is personal or business life, continuous tracking of your cash flow enables you to manage it better.
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