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What is Cash Flow and How Do You Manage Yours?

If your business lacks the cash to pay wages, rent and bills, in the best of times it will struggle to stay afloat. But combining a lack of cash with uncertainty around the economy and survival can be even more difficult.

In times of change, communicating and renegotiating with suppliers, customers, lenders or investors is vital. To do that most effectively, it helps to have the clearest view possible of your cash position.

So in this guide, we’ll help you to understand what cash flow is and how you can manage yours to keep your business in the best possible position for the long term.

What is Cash Flow?

Cash flow is the total cash and cash equivalents that flow in or out of a company. With income or received cash representing an inflow and expenditure representing an outflow.

When you have positive cash flow, you have more cash coming into your business than you have leaving it. This creates more value for shareholders along with maximising free cash flow in the long term. Which is the sum of cash from standard business operations after subtracting any money spent on capital expenditures.

When you have negative cash flow, the opposite is true. A sustained period of negative cash flow can make it increasingly hard to pay your bills and cover other expenses. This is because your cash flow affects the amount of money available to fund your business in its day-to-day operations, otherwise known as working capital.

What is the formula for cash flow?

It is relatively simple to calculate a company's cash flow. You can use the formula below, but first, you need the information on total cash inflow and total cash outflow.

Cash Flow = Total Cash Inflow - Total Cash Outflow 

Why is managing cash flow so important?

Cash allows you to pay staff, make investments and keep the company operational. Cash flow problems cause around 50,000 UK businesses to fail each year, so without understanding and managing your cash flow you can put your business at risk of collapse.

Even an otherwise profitable business can still experience severe short-term cash flow issues – for instance, expenses have been incurred from creating goods or delivering services while waiting to receive payment from a customer.

That’s why creating a cash flow forecast is crucial, so you know if any shortfalls in cash are likely. If they are, it’s important to either reduce spending or find another source of funding to be able to plug the gap and keep trading.

What is a cash flow forecast?

Cash flow forecasting is a system of estimating the inflow and outflow of cash for a business over a specific period of time. Creating an accurate forecast allows you to predict cash positions, avoid damaging cash shortages, and generate returns on surpluses efficiently. 

Managing Cash in Times of Change

If your business or the market faces large changes, having enough cash to cover your expenses for a month or more is vital in helping you stay afloat.

Change can be great for businesses but this is usually only the case if your cash flow has the flexibility for you to adapt. This can impact businesses of all sizes and can arise for many reasons.

There are a variety of  issues that can have a negative effect on cash flow, such as:

  • Changes in consumer demand.

  • Loss of a large customer.

  • Late payment from a client, or not paying at all.

  • Changes in the price of stock or raw materials.

  • Cheaper alternatives entering the market.

  • A general downturn in overall trading conditions.

Being able to adapt to change, however it comes about, is integral to your business’ success. This is why your cash position and understanding your cash flow is so important.

Managing Cash in Times of Growth

If your business is growing, and your profit is increasing, you may expect your cash flow to improve. In reality, growth often causes cash flow problems, as it relies so heavily on cash.

But why? 

  • A product based business must carry additional stock & materials in order to grow.

  • Every sale is funded by the available cash.

  • Customers often receive credit to secure their business and so don’t always pay for new purchases immediately, which can lead to you waiting an extended period for funds to be payable.

How to Improve Your Cash Flow

Depending on how your business earns money, there are a variety of things you can do to aid your cash position. The important thing is to be prepared and, in the face of uncertainty, to seek independent advice.

Some simple measures you can put in place might be to:

  • Improve your systems for following up with debtors.

  • Pre-agree payment terms

  • Lease rather than buy equipment or vehicles

  • Utilise invoice financing to ease your cash flow

  • Increase responsibility over improving your cash position such as increasing the amount of available cash you have for more than 1 month.

Monitor cash flow shortfalls

It is likely that even after you’ve set out high quality plans for your cash flow they might not be enough to generate the income you need. In these situations it is vital to address any shortfalls before they impact the business. 

Here are some suggestions for how to address shortfalls.

Increasing your credit amount:

When you notice this shortfall, it is time to take action. This can involve speaking to your bank for an increase in overdraft or reaching out to a lender to secure a business loan to provide a rapid influx of cash to your business.

Utilise debt factoring

Debt factoring allows you to sell any unpaid invoices to a third party in exchange for a cash sum, this can help to massively reduce cashflow pressure in the short term. This process is also known as invoice finance.

Sell assets to lease them back

This strategy is great for quickly releasing cash equity from an existing asset. Another benefit is that you don’t need to own the asset outright, as asset refinance lenders will take your existing equity into consideration.

Utilise leasing options when growing

As we previously mentioned, growth can actually have a large negative impact on cash flow, so you can use asset finance to lease any equipment to aid growth and spread costs over a longer period to reduce cash flow strain.


There are a number of benefits to creating an accurate cash flow forecast, it can be deemed as a vital element in maintaining the financial health of your business. Here are some of the key benefits of a cash flow forecast.

1. It allows you to predict cash positions

A key reason and benefit of cash forecasting is it allows businesses to better predict future cash positions allowing you to plan your moves further in advance.

2. You'll be able to get out of debt fast

It is common that business owners take out loans in the startup phase of the business or to aid growth. Having a clear cash flow forecast allows for better planning on how to become debt free in the future.

3. Avoid damaging cash shortages

You’ll be able to identify cash gaps and even predict shortages before they happen, helping to take some of the power back. It also means you can act before cash shortages become crippling.

4. Utilise scenario planning to answer questions

Cash flow forecasts give you the ability to scenario plan and answer key “what if” questions that can impact the future of the business. Such as:

  • What if there’s a recession?

  • What if we hire more people?

  • What if sales drop 20% next quarter?

  • What if we expand into a different product or service?

5. earn returns on cash surpluses

They can also help you to capitalise on opportunities as you’ll be able to predict when a surplus will be and nurture opportunities ready for that time.

6. More stability and predictability in business growth

They can help you form a clearer plan for the business’ future helping you to make more informed decisions for more predictable business growth.  An accurate cash flow forecast can almost act as a view into your business's financial future so you can predict, plan and manage your growth with more accuracy.

7. Improves ability for financial decision making

Forecasting gives you better context for decisions so if you are planning on taking on a new client which would require you to hire more staff or purchase more equipment you’ll be able to understand whether you’ll be in a cash shortage. If that’s the case you will be in a better position to get credit or fix the issue before it even arises.

8. Allows you to better monitor overdue payments

It can give you a broader picture of your payments and help you to keep track of regular late payments and also ensure no payments are missed and forgotten about. This helps to improve your cash flow as those that frequently pay late or miss payments can be reminded well in advance to reduce the chance of a missed payment.

9. It helps you to decide whether spending is going to plan

All businesses likely have a revenue target or goal that they’d like to achieve, usually over a specific time period. A cash flow forecast allows you to track and decide whether you’ll be able to reach those goals. This will help you to understand whether you are over or under budget and focus on areas where you are spending too much unnecessarily to aid cost cutting where needed.


Cash Flow Forecast and PSB - ABF
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What's the Difference Between Cash Flow & Profit?

There are a variety of differences between cash flow and profit. Understanding these will allow you to understand your business’ finances more clearly to prevent cash flow issues in the future.

Cash Flow 

This is the money that flows in and out of your business in the form of customer payments, rental income or expenditure through salaries and investments over a given period.


 Whatever remains from your total revenue after deducting your expenses. While profit is commonly used to indicate the immediate success of a business. Cash flow is a great way to determine the business’ health.

One reason for this is because it is possible for a business to be profitable while having a poor cash flow. For example, if you are a construction company that works with large one time clients a late or missed payment could impact all of your jobs for that quarter as you may not be able to fund equipment or pay staff.

If you feel that finance could benefit you and your business towards becoming net zero then please do not hesitate to contact one of our account managers via, call us on 01908 429888 or visit our 'Your Business Finance Guide' section of our website to download our Business Finance Guide.


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