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Cash Flow

Team 365 finance

Written by Team 365 finance

As the saying goes, “cash is king.” While revenue and profits are both essential aspects of any successful business, it’s cash flow that keeps your business operating, growing and becoming more financially stable from day to day.

Below, we’ve explained what cash flow is, why it’s so important for your business and how cash flow differs from profit.


What is Cash Flow?

Cash flow is the amount of cash that’s transferred into and out of your business over the course of a given month, quarter or other period.

Cash flows into your business from customers and clients. This type of cash flow is referred to as inbound cash flow. There are two ways for customers and clients to provide your business with cash:

  • By paying for a product or service at the same time they receive it, giving your business immediate inbound cash flow.
  • Or, by paying for a product or service after the time of purchase, giving your business a source of cash flow from collecting its accounts receivable.

Cash flows out of your business whenever you make a transaction with another party. This type of cash flow is called outbound cash flow. Examples of outbound cash flow include paying your business’s rent, paying taxes or paying a supplier or contractor.

The amount of cash flowing into and out of your business can say a lot about your business’s overall health.

If you have more cash flowing into your business than out, your business is in a “positive cash flow” situation. This means you have enough to pay all of your bills, plus some cash left over at the end of every month or quarter.

If you have more cash flowing out of your business than in, there’s a real risk that your business could run out of funds. In this situation, you might need to use a line of credit, take out a loan or raise capital in order to stay in business and avoid a cash shortage.


Why Cash Flow Matters so Much

Cash flow is one of the most important factors in running a business. When your business has a healthy amount of cash flowing in every month or quarter, you’ll be able to pay your employees, contractors and suppliers without any problems.

Without adequate cash reserves, your business can slow to a crawl as employees, contractors and suppliers go unpaid. According to the Office for National Statistics, between 80 and 90% of small business that fail do so as a result of bad cash flow.


Cash Flow for New Businesses

Cash flow is particularly important (and challenging) for new businesses. When you’re starting a business, it’s common for money to flow out of the business without an equal or greater amount of cash flowing in from customers and clients.

Because of this, many new businesses depend on cash from a loan or line of credit during their first few months or years.


Cash Flow for Seasonal Businesses

In a non-seasonal business, cash flow is reasonably steady and consistent throughout the year.

In a seasonal business, cash flow can be very positive some months (such as a hotel during the peak season) and poor in others. This fluctuation in cash flow means that seasonal businesses need to carefully manage their cash flow to avoid a cash shortage when business is slow.


Cash Flow for Growing Businesses

Most of the time, growth is a good thing for a business. However, in the short term, growth can take its toll on your business’s cash flow. This makes it important to manage cash flow carefully if your business is spending money to expand quickly.


Cash Flow vs. Profit: What’s the Difference?

While they can seem similar at first glance, cash flow and profit are very different things. In fact, it’s possible for your business to make a profit but have negative cash flow and a cash shortage at the same time.

Profit is an accounting concept that’s used to measure financial gains. You can make a profit by selling a certain amount of products and services, but if the customer doesn’t pay for these right away, you might not have any cash flow.

For example, if you use accrual accounting, you might record a profit from a transaction in one month, then not get paid cash for that transaction until one, two or three months later when the customer pays their bill.


How to Manage Cash Flow

Managing cash flow is an essential part of running your business. The easiest way to stay on top of cash flow is to run a cash flow statement.

A cash flow statement records any changes in cash that occurred during a specific period. For example, a cash flow statement for a small retail business might record:

  • Inbound cash flow, such as cash payments from customers.
  • Outbound cash flow in the form of rent payments and payments to suppliers, employees and contractors.

Cash flow statements can record cash flow over a day, week, month, quarter or year. Like with most things related to your business, the more closely you analyse your cash flow, the easier you’ll find it to stay on top of your business’s finances.

You can also use your cash flow statement to project your future cash flow. For example, if your business has accounts receivable that are due in the next quarter, you can look at how payment of these will affect your cash reserves in the near future.

Finally, You can use a cash flow statement to plan ahead for things like buying new equipment or supplies, hiring new employees or making other changes to your business.



Strong, consistent cash flow is essential for any business, from a small sole trader business to a massive international company.

While cash flow isn’t the only factor that matters for your business, it’s definitely one of the most important. Focus on keeping your business cash flow positive and you’ll find it easier to manage and grow your business without having to rely on loans, a line or credit or other financing.