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Cash flow

The Beginner’s Guide to Cash Flow

Income statements show net income. Balance sheets show assets, liabilities, and shareholder’s equity, and cash flow statements show a company's cash position on a monthly, quarterly or annual basis across three activities - operating activities, investing activities, and financing activity. We’ll dive deeper into cash flow below:

Cash flow is the lifeblood of any business, big or small. It is the movement of money in and out of a company, and it is crucial for its survival and growth. Many businesses fail not because they lack a good product or service, but because they struggle with managing their cash flow effectively.

As a beginner, understanding and managing cash flow can seem like a daunting task. But fear not, this article will serve as a comprehensive guide for beginners to understand the importance of cash flow and how to effectively manage it for the success of their business. So, let's dive into the world of cash flow and learn how to keep it flowing in the right direction.

This guide will cover the following topics:

What is Cash Flow?

In short, cash flow is money in and money out. To understand cash flow better, it is best to first understand the two different accounting methods - accrual accounting and cash basis accounting.

Accrual accounting records transactions as they are made and considers non-cash items such as depreciation. Cash basis accounting records transactions when money is exchanged. For example, if a business owner makes a sale but the money is not due on the invoice for 30 days, under accrual accounting the sale will be recorded as soon as it is made even though the money has not yet been received.

Under cash basis accounting, the transaction will be recorded once the item is paid for. Through understanding the two different methods, you can see how there might be a difference between net income which may take into account sales and expenses not yet paid for, and cash flow, which shows how much money the company has on hand.

Actual vs projected cash flow for new businesses

Understanding and managing the flow of money is especially important for starting a new business. One crucial aspect you need to carefully consider is comparing the actual cash flow with what you projected. While projections provide a roadmap, the actual cash flow gives a real-time snapshot of your business's financial health.

Actual cash flow

This refers to the real movement of money in and out of your business. Keeping track of the actual cash flow gives you a clear picture of how well your business is meeting its financial obligations, covering expenses and generating revenue.

Projected cash flow

Your projected cash flow is an estimate that looks ahead based on your own assumptions and forecasts. It’s used as a strategic tool to help you anticipate future financial scenarios and plan accordingly. Projections take into account factors like your sales forecasts, estimated expenses and potential investment you might make at the very beginning of your new business journey. 

What is negative cash flow?

It is not unusual for new businesses to face negative cash flow, especially in its initial stages. This occurs when a company spends more money than it earns during a set-out period. However, it can become concerning if this pattern continues. Negative cash flow can make it challenging to meet your financial responsibilities and maintain your everyday business operations. 

Why do new businesses experience negative cash flow? 

There are multiple reasons why new businesses may experience negative cash flow. These include: 

1. Initial investments - Starting a business typically involves making investments in infrastructure and equipment. You may have even invested in marketing. All these upfront expenses can temporarily exceed your initial revenue.

2. A delay in generating revenue -  It takes time to acquire customers and establish a consistent revenue stream. During this phase, the business may face negative cash flow until sales start to increase.

3. Unanticipated expenses - New businesses often encounter unexpected expenses or challenges that impact their projected cash flow.

How to recover from negative cash flow

It is crucial for a new business to address the issue of negative cash flow in order to ensure its sustainability. To tackle this, there are several steps that can be taken. 

  1. Review and adjust financial projections based on actual performance and market conditions. This will help in getting a clearer picture of the situation. 
  2. Identify areas where expenses can be controlled without compromising essential operations. By finding ways to cut costs, your business can improve its financial situation. Exploring funding options like loans or grants can also provide an injection of cash that can help alleviate the negative cash flow issue. 
  3. Improve invoicing and collections processes will enhance the amount of money coming into the business and improve cash inflow. QuickBooks Online can help you get paid automatically with its invoicing software.
  4. Seek professional advice from financial experts or mentors can also provide valuable insights and guidance on managing negative cash flow effectively. 

What is a cash flow statement?

A cash flow statement is a financial document that details the cash and cash equivalents that a company made and spent over a period of time known as the accounting period. This can be completed annual, monthly, quarterly etc. The cash flow statement is often broken into three sections - cash flow from operations, cash flow from investing, and cash flow from financing. The cash flow statement will start with an opening balance, list cash-in and cash-out across the three activities mentioned above, and end with an ending cash balance. 

Ending with a negative cash balance isn't always bad, and ending with a positive balance isn't always good. For example, if you took out a loan during the accounting period, your cash flow statement may show a lot of cash on hand, but it's actually a high amount of liability. In the long run, you want your main source of cash to come from your business operations, not from loans. It's important to look at trends as well. Occasional negative cash flow is not a big deal, but consistent negative cash flow, especially in your business operations, can mean you're not making enough money to cover your expenses.

In addition to the cash flow statement, publicly traded companies are legally required to create and keep an income statement and a balance sheet in order to demonstrate their financial standing.

Income statements show net income, and balance sheets show assets, liabilities, and shareholder’s equity.

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How do you create a cash flow statement

There are two ways to prepare a cash flow statement: the direct method or the indirect method.

The direct method

Creating a cash flow statement using the direct method involves using cash basis accounting and recording all transactions at the time when money was exchanged. Common transactions include:

  • Cash collected from sales
  • Cash paid to vendors and suppliers
  • Salaries paid out to employees
  • Cash received from a loan

The direct method may be better suited for small businesses that have fewer daily transactions, less diverse income sources and expenses, and fewer fixed assets.

The indirect method

Creating a cash flow statement using the indirect method involves using accrual accounting and gathering information from the income statement and balance sheet. With the indirect method, accountants start with the net income of a company and then add or deduct balance sheet items to determine cash flow. In this way, things like depreciation and accounts receivable are considered in the cash flow statement, where they wouldn’t be with the direct method. Common transactions include:

  • Depreciation
  • Accounts receivable
  • Accounts payable

While the direct method is often simpler to think of as it is the typical money in money out scenario, many businesses use the indirect method as it can be easier calculated from the income statement and balance sheet and is based on accrual accounting. However, the direct method is often preferred as it contains more information and is often more accurate. 

Additionally, both the direct and indirect methods are accepted by GAAP and IFRS

See more about Cash Flow statements and download a template.

Why do you need a cash flow statement?

Running a small business involves juggling many financial aspects. A cash flow statement helps navigate this landscape and keep your finger on your business’s financial pulse. Cash flow statements offer:

  • Clear Financial Insight: A cash flow statement provides a clear picture of how money moves in and out of your business. It breaks down where your cash comes from (income) and where it goes (expenses) in a specific period.
  • Better Decision Making: With accurate cash flow information at your fingertips, you can make informed decisions. It helps you plan for upcoming expenses, avoid cash crunches, and seize growth opportunities when they arise.
  • Debt Management: Managing loans and credit lines is easier when you can anticipate your cash flow. A cash flow statement helps you plan repayments and avoid unnecessary interest costs.
  • Budgeting and Forecasting: Creating a realistic budget becomes more achievable when you have past cash flow data. Forecasting future cash flows allows you to set achievable financial goals.
  • Attracting Investors or Lenders: If you ever seek external funding, investors or lenders will want to see your cash flow statement. It demonstrates your business's ability to generate consistent revenue and manage its finances.
  • Tax Planning: Understanding your cash flow can aid in tax planning. It helps you ensure you have enough funds to meet tax obligations and avoid penalties.

In summary, a cash flow statement is your financial GPS for navigating the often turbulent waters of small business. It empowers you to make sound financial decisions, manage your business more effectively, and ultimately, secure a brighter financial future.

In the world of small business, mastering cash flow is a game-changer. QuickBooks is here to empower you on this financial journey. Our intuitive tools simplify cash flow management, helping you track income, expenses, and more. Sign up for a free 30-day trial today and experience firsthand how QuickBooks can be your trusted partner in helping to generate a healthy and positive cash flow. Start now and pave the way for a more prosperous financial future.


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