What is cash flow? A guide for small business

Finance and legal

17 August 2021

As a small business owner, it’s important to understand the way your money moves in and out of your business. Having control over your cashflow is the key to a successful business. When your cash dries up, it can be difficult to bring your bank balance out of the red which affects every aspect of your business.

Understanding your cash flow can be tricky. But it doesn’t need to be. AXA’s easy guide to cash flow explains everything you need to know so you can stay on top of your finances.

 

What is cash flow?

Your cash flow represents the transactions in and out of your business’ bank account. When you have more money than you need to cover your expenses, you have a positive cashflow. But if your expenses exceed the money coming into your business, you have a cash flow problem. 

Cash flow only represents the balance in your bank account, so it’s possible for your business to turn a profit and still have poor cashflow.

Quick definition: Cash flow measures the money coming in and going out of a business.

Cash flow statement

A cashflow statement is a standard financial statement in business. Essentially, a cash flow statement reports on the money coming in and going out of your business.  

The cash flow statement follows the cash made by your business through operations, investment and financing. The sum of these three areas is called the net cash flow which can help investors determine the value of a business.

Cash flow forecast

A cash flow forecast will tell you how much money your business is expected to make in sales and how much it’s likely to spend in business costs over a set period of time. It can also help you understand when and how much money will enter and leave your bank account at any given point.

Taking the time to set out your cashflow forecast and then adapting it throughout the year gives your business the best possible chance of success. There are lots of free financial templates available - industry bodies like the Association of Chartered Certified Accountants (ACCA) and local authorities offer free cash flow forecast templates.

 

Why is cash flow important?

Cash flow is one of the most important aspects of running a small business. You need to make sure you’re earning enough and not spending too much. How often your money comes in is just as important as the amount of money coming in. Having a regular income means you can stay on top of your business expenses and deal with any unexpected bills that come your way.

Over 60% of startups fail in the first three years and not having enough cash is cited as one of the main reasons for not surviving. In the early days, startups often need to fork out for things like expensive equipment, website domains and deposits for office space. To cover the cost of these expenses and still have money left over when your business opens up, you need to understand and manage your cash flow.   

Remember: You can apply for a small business grant for the government to top up your income. Read more about it here.

 

Tips for good cash flow management

If you’re really worried about your finances, we’d always recommend speaking to an accountant or financial advisor. However, if you think your business could do with just tightening the purse strings and improving cash flow, check out these tips…

  • Keep your business and personal finances separate

If you mix your personal finances with business finances, you’ll never fully understand how your business is performing. Keeping them separate means you’ll know how much money your business is generating so you can pay yourself a proper wage and use any extra money to grow your business.

  • Don’t be too generous with customers

It can be tempting to offer customers excessive discounts or more time to pay in an attempt to win them over. But remember, you can be flexible with customers and build strong relationships without being a pushover. 

  • Improve productivity in your business

It might sound obvious, but if you accomplish more work in the same amount of time, you could bring in much more revenue! Think about the tasks you need to do all the time and consider whether they could be consolidated into one weekly task.  Whether you’re processing orders or dealing with suppliers, if you streamline your workflow, you’ll free up time to take on more customers and earn more money.

  • Increase your prices if you need to

If your prices are set too low, your cash flow profits will suffer and people might assume your product is of poor quality. But if your prices are too high, you run the risk of putting people off completely. Read AXA’s guide to pricing to make sure you’re striking the right balance.

  • Negotiate prices with suppliers

Good cash flow is much easier to achieve if your expenses are lower. So, as a small business, it’s wise to remember that your relationships with suppliers and vendors are a two-way street. They often need your business as much as you need theirs. You might be able to leverage your value and negotiate a discount or better trading terms.

  • Get your invoicing right

Customers aren’t always in a hurry to pay you, which is why it’s important to have a good invoicing system in place. But even then, no matter how prompt you are in sending an invoice if it’s poorly worded or incomplete, you won’t see your money in a hurry.  Read AXA’s guide to invoicing here.

  • Use accountancy software tools

There are lots of free an inexpensive apps and tools than can make it easy to track your business’ finances, monitor cashflow and balance the books. For more information about accountancy software for small businesses, check out AXA’s guide here.

  • Offer customers discount who pay upfront

It can be costly and time consuming when customers are reluctant to pay or regularly pay late. Offering even a small discount for customers who pay upfront could incentivise early payment and really boost your cash flow.

 

Understanding your cash flow is the key to success in business. Knowing when and how your money moves around the business is good place to start. Then, when you’ve got a solid grip of your finances, you can adopt cash flow management techniques to ensure your business always has a regular income.

 

Work hard, insure easy

Running a business is hard work. That’s why we’re doing all we can to make your insurance a bit easier. From helping you tailor your policy to your unique business needs, to taking the guesswork out of finding business insurance, find out what we’re doing to help small businesses.