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Cash flow is the movement of money that comes into and goes out of your business. These details are reported on your cash flow statement to show where your money is coming from and how your company is spending it over time. While it can be easy to confuse cash flow with profit, cash flow is more concerned with the ins and outs of your business finances than the overall profitability of your company.

If you, like most people running a business, are keen to improve your future planning, then read on for our jargon-free cash flow tips.

What are the three types of cash flow?

There are three main types of cash flow and each of these will appear on the cash flow statement of your company's financials. They are:

  • Cash flow from operating activities - these could be salaries paid to employees, cash paid to vendors and suppliers, interest income, money from customers, etc.
  • Cash flow from financing activities - some of these could include receiving cash from issuing debt or paying down debt, paying cash dividends to shareholders, spending cash to repurchase shares, etc.
  • Cash flow from investing activities - these could stem from proceeds from the sale of marketable securities, the purchase of software and website development, the sale of property and equipment, etc. 

Why is cash flow important to businesses?

When planning for your business, you should always prioritise cash flow strategies as it’s key to know your company’s financial standings at any given point in time.

You’ll know that the business is earning more money than it’s spending when you see a positive cash flow. Generally, this should mean that you’ll have cash on hand to cover your expenses such as payroll, equipment purchases, upgrades, loan repayments, etc. However, if you find yourself having a negative cash flow, you may not be able to pay your employees and suppliers, cover rent, or have the money needed for daily business costs.

This is where monitoring your cash flow regularly is crucial because it can give you valuable insights into how you can better prepare your company for growth in the future while helping you identify potential downfalls, shortfalls, and setbacks. 

What is cash flow forecasting?

A cash flow forecast is a plan that shows how much money you expect to earn and pay out over a set length of time. Some business owners like to plan over the course of 12 months while others prefer to focus on three or six-month periods but a basic cash flow forecast will help you see when and where your business is going to need financial support. 

Cash flow is one of the most important ingredients to your company’s financial health and by using a few standard cash flow formulas, you can better prepare for financial fluctuation. The three most common cash flow formulas used are:

  • Free cash flow: Calculating your Free cash flow (or FCF), can help you see how much cash you have available to spend. This differs from the traditional cash flow statement as it shows you what funds are readily available and free to use to reinvest in the company. 
  • Operating cash flow: When looking to get a more typical idea of your cash flow, an FCF doesn’t account for irregular spending, earning, or investments. This is where calculating your Operating cash flow comes in and is of particular interest to investors, financial consultants, and banks as it’s what is looked at when you’re seeking funding.
  • Cash flow forecast: Now, the Cash flow forecast is where you’ll be able to better plan for the future as it will help you understand what cash you’re most likely to have on hand at a particular point in the future, whether monthly, quarterly, etc. 

So, in order to create your cash flow forecast, you'll need to know how to calculate what is currently flowing in and out of your business so that you can get an idea of your current financial standing. But, once you have your base numbers down, you’ll be able to start building our your projections. To build out your forecast, you’ll need to start by knowing your Beginning cash, which is how much you have on hand today. Next, you’ll need to know your Project inflows, which refers to the cash you’re expecting to come into the business over the time you’re forecasting for. And finally, you’re going to need to know your Project outflows, which are the expenses and other payments you expect to make over the forecasting period. 

The calculation would look something like this:

  • Beginning cash + Projected inflows – Projected outflows = Ending cash

It’s quite a daunting task for a beginner to tackle without help - which is why we recommend software like Brixx to help take care of the heavy lifting.

This is the typical formula to calculate your cash flow forecast:

Net income + Depreciation ÷ Amortization – Change in working capital – Capital expenditure = Free cash flow Depreciation + Operating income – Taxes + Change in working capital = Operating cash flow Beginning cash + Projected inflows – Projected outflows = Ending cash = .Cash flow forecast

How can cash flow forecasting help businesses?

A good cash flow forecast is often the solution to avoiding money problems in your business. While there are many advantages to using a cash flow forecast in any business, here are our top four:

  • Know when you’ll run out of cash
  • Ensure a realistic sales forecast
  • Helps validate your business model
  • Essential if you’re selling goods or services on credit

A cash flow forecast is beneficial for any business but arguably more so for a small business or startup because of the instability of their finances. While every business’s needs are different, cash flow management is a critical part of your business planning because it impacts whether you have enough money on hand to cover your future expenses or not. Take a look at the Brixx 'beginners guide to forecasting business cash flow' article for further advice.

How can you improve cash flow?

There are a few cash flow essentials that businesses swear by when it comes to cash flow management which we go into a little deeper in our post about cash flow management. It’s important to keep these in mind and adjust, and build on them, to suit your company’s needs.

  • Be punctual and keep on top of invoices and payments
  • Ensure that your invoices and payments are accurate before finalising any exchange of funds
  • Keep things simple in terms of communication and arrangements with clients and suppliers to help avoid potential issues
  • Monitor your cash flow regularly and be vigilant about payments, deadlines, and payment terms
  • Encourage clients to make payments earlier
  • Charge a deposit as a means of insurance
  • Where possible, run credit checks on clients or suppliers 
  • Keep a healthy balance between sales and expenses

By taking a few simple steps to keep on top of your cash flow, it will help you make better-informed decisions about what’s next for your business. 

How to prepare a cash flow forecast

It can be a little overwhelming at first but you can create an effective cash flow forecast without having to be an accounting wizard. In order to successfully project cash flow, you’ll first need to do an assessment of the previous year's figures - this will form the basis of your forecast. Once your historical data has been entered, you'll be able to adjust for possible or anticipated changes such as pricing changes, increased personnel, increased funding, etc. 

While many businesses opt for the traditional route of creating complex spreadsheets in either Google Sheets or Excel to create their cash flow forecasts, specialised tools exist to make this labour and time-intensive task a breeze. 

Brixx, for example, allows you to easily set up and alter your forecasts at the drop of a hat. Generally, setting up a forecasting spreadsheet from scratch can be a daunting task, leaving much room for human error. But, with a cash flow forecasting tool, you can rest easy knowing your projections will have high levels of accuracy. 

When looking for a forecasting tool, there are so many out there that it can be easy to get lost in all of the noise. A good place to start would be to think about what makes your business unique and how its needs may differ from others. This could include taking a look at your company’s unique cash flow cycle, income, and expenses. You should look for a tool that’s flexible, yet specific enough, to suit your particular cash flow structure needs.

Ideally, you want to look for a cash flow forecasting tool that can integrate with your existing accounting software to help you save even more time and resources. By integrating with your existing records, you can more easily and efficiently forecast for the future and compare actuals with what you’ve projected. Good news for Crunch users, we now integrate with financial forecasting experts, Brixx to help you better plan, manage, and grow your business.

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Updated on
July 22, 2022

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