To get a clear picture 📸 of your business’s financial health, you must follow your cash flow, too.
Cash flow refers to the money that flows in and out of a business during a specific period of time. 🕝 Cash flow-positive businesses have more money flowing in than going out.
But what exactly does cash flow positive mean, and why does it matter? 🧐 Read on for the answers to these questions and more.
Key takeaways 🔑
Cash flow refers to the money that flows in and out of a business during a specific period of time.
Positive cash flow occurs when a business makes more money than it spends.
Negative cash flow occurs when a business spends more money than it makes.
If your business is cash flow positive, that doesn’t necessarily mean you’re profitable.
What is positive cash flow?
Positive cash flow occurs when more cash flows into your business than flows out of it. 🤑However, negative cash flow occurs when your cash outflow exceeds your cash inflow. 💸
Positive cash flow means a company has enough cash on hand to cover its operating expenses–like payroll, utilities, and raw materials.
Here are a few examples of cash inflows vs. outflows:
Cash inflows | Cash outflows |
Selling inventory | Buying inventory |
Customer payments | Customer returns |
Earned interest on investments | Paid interest on business loans or credit cards |
Dividends on high-yield savings accounts (HYSAs) | Business bank account fees |
Rental income | Rent payments |
Tax returns | Tax bills |
Payments for services | Payroll expenses |
Understanding positive vs. negative cash flow
Let’s take a closer look at what positive cash flow is, in comparison to negative cash flow.
Negative cash flow means your business spends more money than it makes. However, negative cash flow doesn’t necessarily mean your business is doomed. 🌩
Let’s say you invest in new equipment because it allows you to produce more inventory. The upfront equipment cost could put your company in the red 🔴 for a few weeks or months.
But the new equipment helps you fulfill more orders and generate more revenue. This example shows how a business investment could cause short-term negative cash flow. But in the long run, this investment could help boost your profitability. 📈
That said, maintaining a negative cash flow isn’t sustainable. If you can’t pay your day-to-day operating expenses, you might have to rethink your pricing, take out a loan, or open a credit card to cover these costs. 😣
Borrowing costs can add up quickly and make your small business vulnerable. But positive cash flow ensures you have enough money to cover your accounts payable and operating expenses. 💸
3 other types of cash flow 💰
You might have heard about some other types of business cash flow. These categories cover a wide range of cash inflows and outflows. Knowing what they are can help you gain a deeper understanding of your business’s financial health.
Here are 3 types of cash flow your business might deal with on a regular basis:
Operating cash flow: This type of cash flow refers to any money generated or consumed by your operating activities, like payroll expenses and sales revenue. 💲
Investing cash flow: This type of cash flow refers to any money your company has made or spent through investing activities, like buying a commercial property or merging with another business.
Financing cash flow: This type of cash flow is specifically related to financing activities, like taking out a business loan and earning dividends from investments.
Is positive cash flow the same as profit? 🤔
In short, profitable businesses are not always cash flow positive, and vice versa.
Positive cash flow means that a business's liquid assets are growing. This growth empowers the business to reinvest in operations, cover expenses, and create a safety net in case of future financial challenges.
Profit, on the other hand, is the surplus remaining after all costs and expenses are deducted from revenue, representing the overall earning performance of the business.
For example, a gym might be cash flow positive due to a consistent inflow of money from monthly memberships. However, the business may not be profitable because it's investing heavily in new fitness equipment and trainers, so it can improve customer experience and stay ahead in a highly competitive market.
As a result, the gym’s income statement would show a net loss, instead of a net profit. However, because the company is cash flow positive, business operations and growth initiatives can continue.
Some small businesses are comfortable having a negative cash flow for a short time if it means long-term revenue growth. However, negative cash flow can harm profitability, so finding the right balance is essential. ⚖️
💡 Want to boost your profits and improve cash flow? Read about the Profit First cash management method here.
Is my business cash flow positive?
Small businesses need cash on hand to keep their doors open. However, many small business owners face liquidity 🌊 issues at some point.
So how do you know if your company is cash flow-positive? Well, you can start by taking a look at your business’s cash flow statement.
A cash flow statement records the movement of a company’s cash and cash equivalents for a given period of time. 💵 This statement can help you determine the value of your liquid assets (think cash) and understand your liabilities (think long-term debts like business loans). 🏦
Most likely, you can find your business’s cash flow statement within your accounting software (like QuickBooks Online or Xero). However, your financial statements will only be accurate if your bookkeeping is up-to-date, so you may want to check with your accountant or bookkeeper before diving in.
Tips for understanding your cash flow statement
While you don’t need to look at your financial statements every day, taking time to review them regularly will help you improve cash flow management.
Reviewing your cash flow statement for the first time? Consider these tips to help you get started:
Start with the basics: Familiarize yourself with the three sections—operating activities, investing activities, and financing activities. This will help you understand the different types of cash inflows and outflows that make up your company's overall cash flow. 💸
Know where to focus: Keep an eye on the “net increase or decrease in cash” line, which shows how much your business’s liquid assets have increased or decreased for a given period. A positive number means your business has more money coming in than going out, while a negative number means the opposite.
Compare cash flow and profit: If there's a significant difference between your business's cash flow and profit numbers, dig deeper to understand why. For example, high profits with low cash flow could indicate your customers are slow to pay, tying up your income in accounts receivable. 😬
Compare with budgets and forecasts: If your business prepares budgets or financial forecasts, compare these with the actual results in your cash flow statement. This comparison can reveal whether your business is meeting, exceeding, or falling short of its goals.
Don't hesitate to seek professional advice: If you're having trouble understanding your cash flow statement, consider consulting with a professional accountant or financial advisor. They can provide expert insight and explain complex financial terms in an easily understandable way. 🙌
Remember, knowledge is power. By understanding your cash flow statement, you can make more informed decisions to guide your business's financial health and growth.
The bottom line on positive cash flow
Ultimately, positive cash flow is a sign that you have a healthy and well-managed business. Remember to keep an eye on your cash flow statement and use it as a tool to guide your financial decisions. With careful planning and smart cash flow management, you can ensure your business's long-term success and profitability. 💪
Manage your cash flow with Relay 💸
Are you a small business owner who wants to make sense of your cash flow? Relay is an online banking and money management platform that helps entrepreneurs like you gain control of their cash flow.
Here are just a few reasons why small business owners love using Relay for their business banking needs:
✅ 20 free business checking accounts: Relay doesn’t charge overdraft fees, maintenance fees, or require a minimum account balance. That means you can easily organize your money into multiple accounts (like profit and operating expenses) and get crystal clear on earning, spending, and saving.
✅ Automated savings: Relay helps you add more breathing room to your budget with automatic savings. Plus, you’ll earn 1-3% APY on every dollar.
✅ 50 physical or virtual debit cards: With Relay, you can instantly issue 50 physical or virtual cards. Digital cards can be used right away for online shopping or with your mobile wallet.
✅ Simplified expense management: Want to organize spending and stay on track with your budget? Relay lets you quickly issue debit cards for new expense categories, project expenses, or separate teams.
✅ Online card controls: No phone calls required. Relay allows you to monitor transactions in real time, set spending limits, and freeze cards right from your phone or computer.
✅ Accounting software integrations: Relay allows you to sync detailed banking data directly into QuickBooks Online or Xero, making bookkeeping a breeze.
✅ ATM accessibility: Relay’s physical Visa debit cards allow you to make cash withdrawals and deposits at AllPoint ATMs with no ATM fees.
Ready to get started with Relay? You can apply for an account online in less than 10 minutes. Sign up for Relay here. 😎
