What is cash flow?

In every company, money comes in and flows out. Cash flow is the cash movement or money flow in this regard, and a perfect tool to monitor your company’s financial position. Cash flow can be both positive and negative. With a positive cash flow, the company receives more money than it spends, while a negative cash flow means that more money goes out than comes in during a specific period. Cash flow is independent of the profit and loss statement balance, as the cash flow can be negative even if the company is making a profit.

What is the importance of cash flow?

There are various reasons why cash flow is important. It is a tool that measures the cash movement, crucial for banks, especially when a company applies for credit. The bank gains insight into the company’s repayment capacity through cash flow.

If income exceeds expenses, and the cash flow is positive, a bank is more likely to grant credit. Understanding cash flow is also vital for the company itself. What if the company is making a profit, but the cash flow is negative? This could be due to outstanding invoices not being collected promptly.

Preventing financial problems

If payments are delayed, the cash flow remains negative, and this can have far-reaching consequences, potentially leading to bankruptcy in the worst-case scenario. This is one of the reasons why it is crucial to conduct effective debtor management when sending and following up on invoices. It is perhaps self-evident that a positive cash flow is a favorable sign. Receiving payment for an invoice contributes to a positive cash flow in this regard.

Calculating cash flow with a simple formula

Calculating a company’s cash flow is straightforward using a formula. It’s a simple equation where you subtract expenses from income.

Cash Flow Formula: Cash inflow - Cash outflow in a specific period

What are the different types of cash flow?

Cash flow can be classified into three types:

• Operational activities
• Investments
• Financing

In operational cash flow, there is incoming and outgoing money related to daily business activities. Purchasing goods and paying salaries fall under operational activities.

For investments, there is investment cash flow, which relates to business investments. For example, expenditures on computers or tools, as well as income from investments, such as the sale of office furniture. Selling an investment is referred to as divestment.

The third type of cash flow is financing cash flow, which relates to investment expenditures or income involving third parties. A simple example is providing a loan to another party or obtaining credit from a bank.

Improving cash flow with debtor management

If there is a persistent negative cash flow, it’s wise to turn the tide to prevent financial problems. A simple solution is available by opting for smart debtor management, such as using tools like Payt. It’s advisable to send invoices to debtors as early as possible, specifying a clear and preferably short payment term, such as a maximum of 30 days.

If payment is not received within the specified term, it’s recommended to follow up on invoices promptly. This also contributes to improving the cash flow position. With Payt, you can use automated follow-up. Make it easy for debtors by offering the option to pay the invoice directly, for example, through iDeal. For long-term projects or deliveries in installments, it’s recommended to send invoices periodically. In case of non-payment, arranging a payment plan is also possible.

Optimizing with cash flow management software

Cash flow management software allows optimal control of cash flows in a business. Do you have a concrete and up-to-date understanding of incoming and outgoing cash flows? Using cash flow software is an ideal solution and offers many advantages, such as efficiently managing payment processes.

Improving cash flow with inventory management

Smart inventory management is also an option to enhance cash flow. Large inventories tie up a significant amount of money that cannot be immediately used. Therefore, it’s wise to make strategic purchases to optimize inventory. This improves the cash flow position, making funds available for business operations. Purchasing from a wholesaler and agreeing to pay later is also ideal. The products are already sold by the time you need to settle the payment.

Cash in hand

Maintaining a good cash flow or having cash on hand is a significant challenge for most entrepreneurs. It becomes even more challenging when the goal is to grow the business. More invoices are sent out, but suppliers are already waiting for payment. Therefore, it’s crucial to have insight into the cash flow and optimize it. Keeping a cash book is essential for this reason.