Understanding Cash Inflows and Outflows: What You Need to Know

Businesses, whether small or large, need to have a firm understanding of their cash inflows and outflows. This is the only way to make sure that the company is on stable financial ground.

In this article, we will discuss what cash inflows and outflows are, and provide some examples of each. We will also talk about why it is important for businesses to track these figures closely. If you are looking for a better understanding of your business’s financial stability, then this article is for you.

What are cash inflows and outflows?

Cash inflows are the money that comes into your business. This could be from sales, investments, loans, and grants, or interest on cash holdings. Understanding your inflows is important because it allows you to make sure that regular payments can be made to creditors and any bills your business will have in the future. 

Cash outflows are when money leaves your business. This includes payments for expenses such as rent, taxes, salaries, supplies, and inventory. Keeping track of and understanding outflows helps you stay on top of spending so you can create budgets and find ways to reduce expenses if needed. It’s a good practice to regularly review expenses and quarterly budgeting will let you identify wasteful spending before it becomes an issue.

Why should you track cash flow?

Tracking cash flow is one of the most important parts of running a business or organization. It gives you a bird-eye view of your finances, helping you identify any financial trends or problems early on.

Without keeping tabs on your inflows and outflows, you’re essentially flying blind, making it almost impossible to accurately price products, make future financial projections, and budget for expenses.

Rather than being reactive in uncertain economic times, tracking cash flow keeps you proactive so you can quickly respond to changing customer needs, economic shifts, and more.

Important cash flow terms to understand

To better read and understand your cash flow and cash flow statements, there are a few key terms to know.

Positive cash flow

Positive cash flow is a useful indicator of the financial health of any business. It is the amount of money that is coming in from sales or other sources, compared to how much money is going out for operational costs. Positive cash flow means they have more money coming into their accounts than they are spending—a crucial sign that they are able to stay afloat and make profits.

To give an example, imagine a restaurant owner who brings in $40,000 worth of sales each month but can keep operational expenses down to $25,000. This would mean that the restaurant has additional disposable income—positive cash flow of $15,000 every month—which can be put towards further investments or saved for slow times.

Negative cash flow

Negative cash flow occurs when a company’s total expenditures are greater than their total income. This means that a company is spending more money than it takes in, which can be a sign of financial difficulty.

To give an example, let’s say that a business has $20,000 in monthly income but has $25,000 worth of expenses. This would indicate negative cash flow since they have exhausted their income and must turn to other sources to keep the business going.

Operating cash flow

Operating cash flow is calculated by subtracting an organization’s operating expenses from its sales that were generated from operations over a period of time. As an example, let’s say you sell handmade items online. After all your expenses such as packaging, shipping, and costs of materials, are taken out, what remains is the operating cash flow for that period.

An example of this could be a retail store. If they made $2000 in sales and paid $400 in operational costs (like payroll or rent), their operating cash flow would be $1600. This could then be used to cover other operational costs, help free up more capital, or more.

Net cash flow

To put it simply, net cash flow gives you the amount of money left over from your business after all expenses have been accounted for.

A great example of net cash flow is when a business has $20,000 in sales income and then pays out $15,000 in expenses. The business would have a net cash flow of $5,000. That’s the difference between what they took in and what they paid out – it’s their bottom line number that gives them a good snapshot of how much money they have on hand.

Cash flow analysis

During a cash flow analysis, the FP&A team evaluates how much money will be available to support business operations. They assess a company’s ability to pay off both short-term and long-term debt obligations. The team looks at a company’s money, investments, profits and losses to see if there is enough money for the company to keep running.

For example, if a company’s expenditures exceed its revenues for extended periods of time then it might struggle to handle any increase in daily expenses. The FP&A team might then find potential solutions such as renegotiating certain contracts or finding new sources of income to improve cash flow.

Free cash flow

Free cash flow (FCF) represents the amount of cash left over after all normal operating activities and investments necessary to maintain a business’s capital assets have been accounted for.

For example, if a company reported $1 million in specific operating cash flows, but then they needed to spend a further $500,000 on maintaining their machinery, then the free cash flow would be $500,000. Keeping an eye on this figure can tell you how much money a company has available to reinvest into new opportunities or repay shareholders and creditors.

Some example cash flow statements

Let’s look at some examples of cash flow statements.

The first example is a statement that looks at the total cash inflows and outflows over a certain period of time. This type of statement highlights how much money the company has received in comparison to how much it has spent, as well as any changes between these two figures.

Example 1: XYZ Company Cash Flow Statement

For the Year Ended December 31, 2022

Cash inflows:

• Sales revenue: $500,000
• Loan proceeds: $50,000
• Investment income: $10,000
• Total cash inflows: $560,000

Cash outflows:

• Cost of goods sold: $250,000
• Salaries and wages: $100,000
• Rent: $50,000
• Supplies and materials: $25,000
• Marketing and advertising: $20,000
• Loan payments: $10,000
• Taxes: $5,000
• Total cash outflows: $460,000

Net cash flow: $100,000 (cash inflows of $560,000 minus cash outflows of $460,000)

In this example, XYZ Company had a net cash flow of $100,000 for the year ended December 31, 2022. This says that the company had more cash inflows than outflows during the year, which is a positive sign for its financial health. The cash inflows came from sales revenue, loan proceeds, and investment income, while the cash outflows included expenses like cost of goods sold, salaries and wages, rent, and marketing and advertising.

Example 2: ABC Online Store Cash Flow Statement

For the Quarter Ended March 31, 2023

Cash inflow:

• Sales revenue: $75,000
• Refunds and returns: ($2,500)
• Interest income: $500
• Total cash inflows: $73,000

Cash outflow:

• Cost of goods sold: $35,000
• Website hosting and maintenance: $2,000
• Marketing and advertising: $10,000
• Salaries and wages: $20,000
• Rent: $2,500
• Payment processing fees: $2,500
• Total cash outflows: $72,000

Net cash flow: $1,000 (cash inflows of $73,000 minus cash outflows of $72,000)

In this example, ABC Online Store had positive cash flows of $1,000 for the quarter ended March 31, 2023. The business had slightly more cash inflows than outflows during the quarter. The cash inflows came from sales revenue, interest income, and refunds and returns, while the cash outflows included expenses like cost of goods sold, website hosting and maintenance, marketing and advertising, salaries and wages, rent, and payment processing fees.

Analyzing cash inflows and outflows

One way to analyze cash inflows and outflows is to calculate your net cash flow. This is simply the difference between your cash inflows and outflows during a specific period of time. If your cash inflows are greater than your outflows, you have a positive net cash flow, and if your outflows are greater, you have a negative net cash flow.

Analyzing your net cash flow can give you a good idea of your overall financial health. If you consistently have a positive net cash flow, it means you are bringing in more money than you are spending, which is great news! This surplus can be used to save for the future or invest in other ventures. However, if you consistently have a negative net cash flow, it may be time to reevaluate your spending and find ways to reduce your expenses.

Another tool for analyzing cash inflows and outflows is a cash flow statement. This statement shows the movement of cash into and out of your business or personal accounts over a specific period of time. It includes cash inflows from sources like sales, loans, and investments, and cash outflows from expenses like rent, salaries, and inventory. By reviewing your cash flow statement, you can identify areas where you may be overspending and find opportunities to increase your cash inflows.

How do cash flows affect the cash flow statement and balance sheet?

Cash flows directly impact the cash flow statement and balance sheet. They primarily affect an organization’s liquidity, solvency, and capital structure. The cash flow statement looks at actual and expected cash inflows and outflows over a given period – like a month or quarter. Meanwhile, the balance sheet shows how all investments are performing in terms of assets, liabilities, equity, contributions received by owners, or any other investments. 

Short-term investments such as liquid securities usually provide benefits of additional liquidity while creating long-term value. Receiving cash from these types of investments allows organizations to quickly reinvest it internally or externally for further gains. Long-term investments are typically less liquid assets that may require more time to generate returns depending on the type of asset class being invested into; examples include real estate and fixed-income securities. A company’s source(s) of financing also influences its short-term cash requirements which ultimately impacts its ability to pay back liabilities quicker than expected. 

Finally, consider future cash inflows from existing projects as well as future investments when evaluating both the cash flow statement and its corresponding balance sheet. A comprehensive understanding of a firm’s short-term risk exposure will ensure project goals are still achieved while supporting longer-term stability.

What factors influence cash flow?

Several factors can impact cash flow, including accounts receivable, accounts payable, wages and salaries, revenue costs and technology. Let’s examine them:

1. Accounts receivable: This refers to the money that a business is owed by its customers. If customers take longer to pay their bills, it can have a negative impact on the cash flow of the business. So, if a business has a lot of outstanding invoices, it may struggle to pay its own bills and expenses.
2. Accounts payable: This refers to the money that a business owes to its suppliers and vendors. If a business has a lot of bills to pay, it can put a strain on its cash flow. Manage accounts payable carefully to avoid running into cash flow problems.
3. Wages: Employee wages are a significant expense for most businesses. If a business has a large payroll, it can impact its cash flow, especially if revenue is not coming in as expected. Budget carefully and ensure that they have enough cash on hand to pay their employees.
4. Revenue costs: Revenue costs refer to the expenses associated with producing and selling a product or service. These costs can include raw materials, manufacturing expenses, and marketing costs. If revenue costs are too high, it can put a strain on a business’s cash flow, especially if sales are not meeting expectations.
5. Technology: Technology can both positively and negatively impact a business’s cash flow. On one hand, investing in new technology can help a business streamline its operations and increase efficiency, which can lead to cost savings and increased revenue.

Tips on increasing cash flow

Here are a few tips for increasing and managing cash flow:

1. Review your pricing strategy. Are you charging enough for your products or services? If not, consider raising your prices. Of course, you don’t want to price yourself out of the market, but if your prices are too low, you may not be generating enough revenue to cover your costs.

2. Evaluate your expenses. Take a close look at your expenses and see if there are any areas where you can cut back. For example, do you need to rent office space? Could you downsize to a smaller space? Are there any unnecessary expenses that could be eliminated? Reducing your expenses will free up more cash for other aspects of your business.

3. Improve your collections process. If you’re not already doing so, start requiring customers to pay upfront for goods or services. You can also offer discounts for early payment. Both of these strategies will help improve your cash flow.

4. Get creative with financing. There are many options available for financing your business, so explore all of your options and choose the one that best suits your needs. You may need to take out a loan, use credit cards, or even crowdfunding to get the cash you need to keep your business running smoothly.

Business cash flow: Conclusion

Understanding a business’s cash inflows and outflows is crucial for maintaining its financial stability. Cash inflows refer to money that comes into the business, while cash outflows represent money that leaves it.

Tracking cash flow enables businesses to identify financial trends and problems early on, which makes it easier to make projections and budget for expenses. Positive cash flow means that a business has more money coming in than it is spending, while negative cash flow indicates that a company is spending more money than it is earning.

Key terms that are important to understand include operating cash flow, net cash flow, cash flow analysis, and free cash flow. Overall, keeping a close eye on cash inflows and outflows is essential for the financial health of any business.

Related: 9 Best Business Budgeting & Accounting Software in 2023