What is Cash Flow in Business

21-March-2024
21-March-2024 15:30
in Commercial
by Sam Hodgson
What is Cash Flow in Business

Simply put, cash flow is the movement of cash into and out of your business. Cash in represents payments you take from clients and customers, and cash out is the money you spend on running your business.

When cash in is larger than cash out, then you have positive cash flow, and your business is growing.

When cash in is smaller than cash out, then you have negative cash flow, and your business is shrinking.

It’s a simple theory, but there can be a few nuances and misinterpretations. We break it down in this guide, provide examples, and offer solutions to cash flow difficulties along the way.

Cash Flow vs. Profit

The Birth of a Business - Cash Flow in the Early Days

A Stable Business - Cash Flow for Expansion

A Struggling Business - Cash Flow in Trouble

3 Finance Options to Help Cash Flow in Business

Obtaining Cash Flow Finance 

Cash Flow vs. Profit

Is cash flow the same as profit? No.

While the two metrics can look the same from a casual eye, there are some key differences between them.

Importantly, cash flow is the income and outgoings of money during a specific period, while profit represents the money left at the end of an accounting year once all costs are deducted from revenue.

To illustrate, consider the example of a cleaning firm that sells its services to large office-based organisations:

On paper at the end of a year, the cost of staff, materials and other expenses (costs) is lower than the total income (revenue), marking the company as a profitable business. However, with 30-day invoicing terms and capital tied up in investments such as company vans, the business often struggles with cash flow, desperately scrabbling to pay staff or suppliers while chasing invoices.

It is possible for profitable businesses to 'go under' due to negative cash flow problems, especially in the first few years of trading where these problems can feel exacerbated.

See similar: 51% of SME Finance Provided by Specialist Lenders

What is Cash Flow in Business

The Birth of a Business - Cash Flow in the Early Days

Startup companies can often feel strangled by difficult cash flow. When building a business it can take time to stabilise cash flow and capital can be quickly drained in order to pay the business running costs - don’t panic!

Remember, this is normal for any young business looking to establish itself and should have been factored in to any business financial planning.

Nonetheless, startup business may want to look at various cash flow finance options to help them build to a strong position where cash flow is settled and capital is no longer needed to be leveraged as strongly. 

A Stable Business - Cash Flow for Expansion

As the business grows, positive cash flow is used to expand. Having a good cash flow situation means that you can venture forward, taking advantage of opportunities that arise and making sure the business builds steadily and securely.

Cash flow finance options for expanding businesses are there to speed up the process of growth, with options such as invoice finance or merchant cash advance providing a backup lifeline to use as and when needed to smooth out the dips in cash flow.

What is Cash Flow in Business

A Struggling Business - Cash Flow in Trouble

Businesses with negative cash flow can often see the solution just over the horizon, leading to a lot of ‘if only’ moments. Thankfully, finance exists to pull you back from the brink, providing a helping hand to your cash flow that sees you through the difficult times and back to calmer waters.

Cash flow finance is expertly positioned to ensure that profitable businesses are able to weather any difficult periods. 

3 Finance Options to Help Cash Flow in Business

There are several financial products to help cash flow in businesses. The following are a selection of products designed specifically to take away the difficulties of cash flow and ensure a constant positive trajectory.

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1. Capital Injection - Boosting Cash Flow in Business

An injection of capital can definitely help cash flow, providing a back up fund in the bank that can see you through any periods of low or negative cash flow.

Both secured and unsecured business loans can be leveraged to improve cash flow and are especially common in the early days of start ups, taking the brunt while the business builds itself to a stable ongoing position.

Other options, such as a business bridging loan to seize an opportunity that might otherwise slip away, can also be used to provide additional cash flow when needed.

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2. Revolving Credit Facilities - Smoothing Cash Flow in Business

Perhaps one of the best back up solutions for cash flow in business is the range of revolving credit facilities, often called lines of credit, that exist to provide additional funds when needed.

Unlike a standard loan with a one off payment that’s repaid through regular monthly repayments, revolving credit facilities provide access to additional money that you can dip in and out of as required.

With interest only paid on the amount used, properly managed lines of credit can give your company the extra financial power it needs without becoming a burdensome cost.

Common revolving credit facilities for businesses include:

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3. Asset Finance - Taking the Strain Away from Cash Flow in Business

Obtaining assets can be difficult, draining all-important capital and putting a considerable strain on current cash flow.

Spreading the cost of large physical investments can ensure that cash flow remains positive and avoids putting pressure on other aspects of the business finances.

Asset finance includes leasing agreements, hire purchase, and other methods of obtaining tangible assets for both short- and long-term use. Consider asset finance for:

-      Company vehicles

-      Specialist machinery

-      Upgrading technology and software

-      Office furnishings

What is Cash Flow in Business

Obtaining Cash Flow Finance

Understanding how to best use cash flow finance and selecting the right business finance can be a complicated endeavour, involving considerable research and comparing the various options to see what best suits your business.

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Or you can leave it to the experts.

At Clifton Private Finance, our team of professional financial advisors can analyse your business cash flow and develop a tailor-made solution that is perfect for your company. Why not contact us today and see what finance options we can offer.

To see what we can do for you, call us on 0203 900 4322 or book a free consultation below.

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