For any business, cash flow is an essential financial metric. If you lack the cash to pay bills, wages, and rent, your business will struggle to stay afloat – and that makes it essential to always have a clear view of your cash flow.
In this article, we’ll cover what cash flow and cash flow forecasting are and why staying on top of your cash flow forecasting is vital.
What is cash flow?
Cash flow refers to the movement of money into and out of a business or organisation over a specific period of time.
Typically, there are three main categories of cash flow:
- Operating cash flow: Operating cash flow is the cash generated from core business activities, such as selling goods and services. It includes cash receipts from customers and cash payments for expenses such as salaries, rent, and supplies. Positive operating cash flow indicates that a company can cover its operating expenses and potentially expand its operations.
- Investing cash flow: Investing cash flow reflects cash spent on or received from investments in assets, such as purchasing or selling property, equipment, or securities. A negative cash flow from investing activities could mean a company is investing in its future growth, while a positive cash flow might indicate the sale of assets.
- Financing cash flow: Financing cash flow is the cash exchanged between a company and its owners or creditors. It includes cash inflows from borrowing money or issuing stock, and cash outflows for paying dividends or repaying loans. A positive financing cash flow may show that a company is raising capital, while a negative flow could indicate debt repayment.
The cash flow generated from sales is directly linked to the methods used for processing payments. Read more about how merchant accounts facilitate these transactions.
Why cash flow matters
Cash flow is the lifeblood of any business. Even a company with strong sales and profits can struggle if it doesn’t have enough liquid cash to cover day-to-day expenses. Healthy cash flow ensures your business can:
- Pay bills and employees on time, keeping operations running smoothly.
- Invest in growth opportunities – such as new equipment, marketing, or hiring.
- Withstand challenges – like seasonal dips, late customer payments, or economic slowdowns.
- Reduce financial stress by avoiding the need for emergency loans or short-term credit.
In short, managing your cash flow effectively gives you control, stability, and the confidence to make strategic business decisions.
Cash flow vs profit: What is the difference?
The difference between cash flow and profit lies in what each term measures and how they reflect the financial health of a business. Both terms provide important insights for managing a business, which makes it essential to understand them both.
In the table below, you’ll find an overview of the differences between the two:
Cash flow
Refers to the movement of money into and out of a business. Shows the company’s ability to generate cash to fund operations, pay bills, invest in growth, and meet other financial obligations.
Measurement: Calculated based on the cash transactions that occur within a specific period, including operating cash flow, investing cash flow, and financing cash flow.
Timing: This considers the timing of when money is received or paid. For example, it’ll only recognise sales revenue when cash is received, not when a sale is made.
Focus: Emphasises liquidity and the ability to cover short-term obligations.
Profit
The financial gain a business achieves after subtracting all expenses from its total revenue. Indicates the overall financial performance of the business.
Measurement: Calculated using the accrual accounting method, which records revenues and expenses when they’re earned or incurred. Can be broken down into gross profit, operating profit, and net profit.
Timing: Revenues and expenses that have been incurred but not yet paid or received may be included. This means a business that’s profitable on paper may still have cash flow issues.
Focus: Emphasises overall profitability and long-term financial performance.
What is cash flow forecasting?
Cash flow forecasting is the estimation of the future flow of cash in and out of a business over a specific period. It helps companies estimate their future cash balances, giving them insight into their business’s likely future state.
Cash flow forecasting involves estimating the amount of cash coming into and leaving a business over a specified period. This helps companies accurately monitor their cash flow and avoid cash shortages.
Why is cash flow forecasting so important?
Cash flow forecasting is important for several key reasons:
- Liquidity management: Cash flow forecasting helps you ensure you have enough cash to meet short-term obligations like payroll and bills.
- Planning and decision-making: By predicting future cash needs, you can plan for investments, expansions, or cost-cutting measures.
- Risk mitigation: Identifying potential cash flow shortages early allows you to take corrective actions, such as securing additional financing or adjusting operation strategies.
- Investor and lender confidence: A reliable cash flow forecast can build confidence among investors and lenders, showing that your business is well-managed and financially stable.
- Operational efficiency: Regular forecasting encourages close monitoring of cash flow, which can improve a business’s financial discipline and operational efficiency.
Overall, cash flow forecasting is a crucial tool for maintaining control of your finances, avoiding surprises, and making strategic decisions that support the growth and stability of your business.
3 best practices for effective cash flow management
1. Monitor cash flow regularly
Regularly monitoring cash flow allows your business to stay on top of its financial situation, quickly identify trends, and address issues before they become problems. By closely monitoring cash inflows and outflows, you can ensure your business remains solvent and can meet its obligations.
2. Optimise receivables and payables
Managing the timing of when you receive customer payments and when you pay your bills is crucial for maintaining liquidity. Slow receivables can create cash flow gaps, while paying bills too early can unnecessarily deplete cash reserves – in short, balance is important.
Encourage faster payments. For example, you can offer discounts for early payment or use invoicing software to automatically send reminders to customers. On the payables side, negotiate longer payment terms with suppliers to retain cash longer – but avoid delaying payments that could incur late fees or harm your relationships with key suppliers.
3. Maintain a cash reserve
A cash reserve acts as a financial safety net. It helps your business navigate unexpected expenses, economic downturns, or sudden revenue declines. It provides peace of mind and reduces the need for emergency loans or credit lines.
Set aside a portion of your profits on a regular basis to build and maintain a cash reserve. You should aim to have enough cash to cover three to six months of operating expenses. Review and adjust the reserve amount as your business grows or faces market changes.
By implementing these best practices, you can enhance your cash flow management and ensure you have the necessary liquidity to operate smoothly and respond effectively to business opportunities and challenges.
How to forecast your cash flow effectively
Once you’ve put these basics in place, the next step is to anticipate future cash needs. That’s where cash flow forecasting comes into play.
Cash flow forecasting lets you predict how much money will come in and go out over the next few weeks or months. By doing so, you can identify potential shortages early, plan your spending wisely, and ensure you always have sufficient liquidity to meet your obligations.
Here’s how to do it effectively:
1. Track your inflows and outflows
Begin with a detailed record of past revenue and expenses. Include:
- All sources of cash, from sales and loan proceeds to occasional one-off income.
- Recurring expenses such as rent, utilities, and payroll.
- Supplier payments and seasonal costs may affect cash availability.
2. Choose a forecasting period
When it comes to forecasting periods, there are several ways to do it:
- Weekly forecasts are ideal for businesses with tight cash flow or high transaction volumes.
- Monthly forecasts work for more stable operations or long-term planning.
- Rolling forecasts can provide an up-to-date view by continually updating as new data comes in.
Select the model that best suits your business needs.
3. Incorporate scenarios
Scenario planning allows you to make quick adjustments before cash issues arise. Prepare for various possibilities to mitigate risk: model best-case, expected, and worst-case scenarios, and account for potential delays in payments, unexpected costs, or seasonal revenue fluctuations.
4. Use the right tools
Technology can make forecasting more accurate and easier. Leverage accounting software or dedicated cash flow management tools to automate calculations. Utilise real-time dashboards and alerts to instantly identify low balances or unusual trends, and integrate payment and invoicing systems to streamline forecasting and minimise manual errors.
5. Review and update regularly
A forecast is only useful if it reflects reality. Compare projected cash flow with actual performance to refine your assumptions. Update forecasts whenever major changes occur, such as the signing of a new client contract, a new loan, or an investment. Regular review ensures your forecast remains a reliable guide for decision-making.
By following these steps, your business can stay ahead of cash flow challenges, make informed financial decisions, and maintain the liquidity needed to operate smoothly a
Cash flow and Instant Payments
Learn more about how Brite can improve your cash flow with it’s Instant Payments product. Learn how Brite enables hassle-free, secure, cost-effective A2A payments for your customers –with instant refunds included as standard.
