Cash flow is the movement of money through your business (aka any income coming in). It’s the lifeblood of small businesses, especially during the startup stage when expenses may be higher and every penny counts. Unsurprisingly, cash flow is one of the biggest sources of stress for small business owners.
Cash comes in from customers who buy your products or services, so any delays on payments can affect your ability to pay for rent, supplies, or other expenses. One way to look at the overall finances of your business is through a cash flow statement. This tool can give you a quick sense of whether you have enough cash coming in to run your business without going bankrupt.
Positive cash flow, net cash flow and liquidity
Positive cash flow
Put simply, positive cash flow occurs when you have more cash coming into your business than going out on expenses. It’s the best situation to be in, but an unusually high amount of positive cash flow could indicate that you are not spending enough on stock. Use Square Inventory Management to keep tabs on what is selling well, or selling out, so you have enough product to meet demand.
Negative cash flow is the opposite, and means that cash outflow is higher than income. Although not ideal, it generally means a mismatch of expenditure and income rather than a serious loss. Business owners often take out credit lines through their banks to cover temporary phases of negative cash flow.
Net cash flow
Net cash flow is the difference between your company’s payments and the receipts for sales made. Most businesses calculate this every month on a cash flow statement. These statements are important tracking devices that give you an overall snapshot of the financial health of your business. They can also act as a warning system if sales are falling or there has been an increase in expenses. Square Dashboard helps you keep tabs on live sales data, customize the date range to compare your incoming cash flow to previous days, weeks or years, and use historical data to look for trends.
Liquidity refers to your ability to pay your bills and convert your assets to cash if needed. Liquidity could exist in the form of an emergency savings account, a credit line or even a mortgage. It’s necessary to be prepared for unforeseen expenses in your business, and although liquidity is usually reserved for negative circumstances such as a rent hike when cash is needed quickly to save a business, it can also be useful to have fast access to cash when an opportunity comes along that requires quick action, such as a good deal from a supplier or a larger space.
What is operational cash flow?
Operational cash flow relates to income that is coming in solely from your core business operations, rather than from external financing or investments. The amount of operational cash flow is important as it shows your business’s potential to expand, pay your suppliers and staff and generate revenue on its own using everyday income rather than external financing.
Cash flow analysis
Cash flow analysis involves looking at areas such as inventory, credit terms and invoicing as a way to identify potential cash flow problems. These projections can be done by comparing your total unpaid purchases to your total sales due at the end of each month to see how things are going. You can also use Square Analytics to compare historic sales data and look at the payment methods being used.
Analysis is divided into cash flow from investments, financing and operations. Operational cash flow can be worked out by looking at your working capital (your current assets minus current liabilities), taking into account your short-term debt, increases or decreases in inventory and accounts receivable and payable.