Categories
What is Cash Flow in Business? | The Full Guide
Simply put, cash flow is the movement of cash into and out of your business. Cash in represents payments from clients and customers, and cash out is the money you spend on running your business.
Written by: Sam Hodgson
Cash flow is the lifeblood of any business, determining its ability to operate, grow, and weather challenges. While many equate cash flow with profitability, the two are distinct metrics, and it's possible to have one without the other.
When cash in is larger than cash out, you have positive cash flow, and your business grows.
When cash in is smaller than cash out, you have negative cash flow, and your business is shrinking.
It’s a simple theory, but there can be a few nuances and misinterpretations. This guide breaks it down, provides examples, and offers solutions to cash flow difficulties along the way.
Key Takeaways
- Cash flow refers to the movement of money into and out of a business.
- Cash flow reflects real-time liquidity, while profit shows the financial surplus after costs are deducted from revenue.
- An injection of capital can help support a business's growth at any stage, but particularly in the early stages of a start-up.
- Professional advisors can help businesses navigate cash flow financing options to find tailored solutions for their needs.
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
Cash Flow vs. Profit
Is cash flow the same as profit? No.
While the two metrics may appear similar to a casual observer, they have some key differences.
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.
Negative cash flow problems can cause profitable businesses to 'go under', especially in the first few years of trading, when these problems can feel exacerbated.
See similar: 51% of SME Finance Provided by Specialist Lenders
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, stabilising cash flow can take time, and capital can be quickly drained to pay the business's running costs - don’t panic!
Remember, this is normal for any young business looking to establish itself and should have been factored into any business' financial planning.
Nonetheless, startup businesses may want to consider various cash flow finance options to help them build a strong position where cash flow is settled, and capital no longer needs 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 speed up growth, with options such as invoice finance or merchant cash advance providing a backup lifeline to use as and when needed to smooth out dips in cash flow.
A Struggling Business - Cash Flow in Trouble
Businesses with negative cash flow can often see the solution just over the horizon, leading to many ‘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 profitable businesses can weather difficult periods.
See the latest market news below.
2024 Business Finance Market Update
In the past year, business finance saw significant growth, perhaps surprisingly driven by challenger lenders and alternative finance providers. Many of these lenders reached their largest milestones in 2024, primarily through supporting SMEs that may have struggled to access traditional funding elsewhere.
Businesses are continuing to face significant economic challenges carried over from 2023. High inflation, supply chain disruptions, and geopolitical tensions persist, which have complicated financial planning and made it difficult for businesses to acquire funding.
But the Bank of England has cut its base interest rate for the first time in 4 years, signalling a cautious shift toward economic stabilisation after years of inflationary pressure. Further cuts are anticipated, and businesses can expect a flurry of spending in the coming months.
As well as this, a number of banks and large firms seem to be racing to the finish line to implement generative AI and new technology that could streamline business and boost profits. Enhancing tech in banking looks like a win-win for lenders and borrowers, offering more personalised financial solutions and a quicker, more secure process.
In the tech industry, investments in AI are reshaping business. Tech giants like Alphabet, Amazon, and Microsoft have seen their market values surge, driven by the rush to implement AI.
3 Finance Options to Help Cash Flow in Business
Several financial products help business cash flow. The following are a selection of products designed specifically to alleviate cash flow difficulties and ensure a constant positive trajectory.
1. Capital Injection - Boosting Cash Flow in Business
An injection of capital can definitely help cash flow, providing a backup fund in the bank that can see you through periods of low or negative cash flow.
Both secured and unsecured business loans can be leveraged to improve cash flow. They 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 provide additional cash flow when needed.
How Much Could You Borrow?
Use our business loan calculator below to see what you could borrow.
2. Revolving Credit Facilities - Smoothing Cash Flow in Business
Perhaps one of the best backup 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:
- Corporate credit cards
- Business overdrafts
- Invoice financing
- Merchant cash advance for B2C businesses
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 purchases and other methods of obtaining tangible assets for both short- and long-term use. Consider asset finance for:
- Company vehicles
- Upgrading technology and software
Obtaining Cash Flow Finance
Understanding how to best use cash flow finance and selecting the right business finance can be a complicated endeavour. It involves considerable research and comparing various options to see what best suits your business.
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?
