Debitoor's accounting dictionary
Cash flow

Cash flow - What is cash flow?

Cash flow describes the movement of money both into and out of a business

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Cash flow refers to both incoming cash as well as outgoing cash. This can take the form of physical bills and coins, card payments, bank transfers, assets, etc. It can be either payments made by your business or to your business.

A business can be a highly complex series of transactions, both incoming and outgoing, meaning that cash is constantly moving - is flowing. Understanding the cash flow in your business can provide you with insight into your company’s financial state.

Understanding cash flow

Keeping track of cash flow and conducting a thorough cash flow analysis regularly can be highly useful for determining the fiscal health of a business. The cash flow statement or statement of cash flows provides an overview of the company’s transactions over a given period of time.

The cash flow of a business can be positive or negative. The cash flow for a certain period can be determined by subtracting the opening balance (the total at the beginning of the period) from the closing balance (the total at the end of the period). Because it only requires a balance at two given times, cash flow can be determined weekly, monthly, quarterly, etc.

If the result is positive, this means that the amount of cash possessed by the business at the end of the period is higher than at the beginning. A negative result means that there is less cash at the end of the period than at the start.

An increasing cash flow is a preferable result, however, it does not necessarily mean that a business has improved liquidity. If assets were sold off during the determined period, this could result in a positive balance, but might in fact indicate a business experiencing financial difficulties.

Incoming cash flow

Cash flow that is paid to your business is considered incoming. It can include payments from customers, profits from the sale of assets, and accounts receivable.

Outgoing cash flow

Outgoing amounts include any payments that your company makes to suppliers, to bank loans, and to accounts payable.

Improving cash flow

Businesses looking to increase their cash flow, whether from a negative to a positive balance or even a higher positive balance, can consider a number of different avenues that can be pursued.

Arguably the most obvious method is to increase sales. Alternatively (or in addition), a business can also increase cash flow by raising the cost of their products or services, or collecting payments from customers more quickly.

Cash flow can also be increased by selling off assets, though this should be undertaken as necessary. Additionally, a reduction of operating costs will help improve the cash flow for a business.

Track cash flow with invoicing & accounting software

In order to improve cash flow, it’s important to keep accurate and thorough records of incoming and outgoing payments. Accounting and invoicing software makes it easy to register and organise both incoming and outgoing payments.

In Debitoor, you can also generate financial reports for a given time period with just a click, giving you an instant overview of your business finances at any time.

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