Jake Ballinger

Jake Ballinger - FP&A Writer

October 2022 - min to read

Cash inflow and outflow: keeping tabs on your financial health

Cash inflow and outflow: keeping tabs on your financial health

Do you have your most recent cash flow statement? How’s it looking? 

Cash flow is the number one factor determining the health and longevity of your business. In over 80% of cases where a business closes, poor cash flow management is the culprit. 

If you’re not sure about your cash inflow and outflow (or know they could be better) you’re in the right place. We’re going to cover the basics of cash flow:

  • What cash flow is
  • The difference between cash inflow and outflow
  • Why tracking cash flow is essential to your business
  • How to track your cash inflow and outflow
  • What influences your cash inflow and outflow
  • How to increase your company's financial strength

By the end of this article, you should be able to confidently calculate your cash flow, understand your cash flow statement, and plan for more positive cash flow in your business. 

Contents

  1. What are cash inflows and outflows?
  2. Why is tracking cash inflows and outflows important?
  3. Types of cash inflows and outflows
  4. How cash flows affect the cash flow statement and balance sheet
  5. What influences cash flow
  6. How to increase your business cash flow
  7. Conclusion

What are cash inflows and outflows?

Cash inflow and outflow are the liquid cash and cash equivalents that move through your business. They're the foundation of your company’s financial position.

Cash inflow may come from sales of products or services, investment returns, or financing.

Cash outflow is money moving out of the business like expense costs, debt repayment, and operating expenses.

The movement of all your cash—in and out—is recorded in detail on the cash flow statement in your financial reporting.

Why is tracking cash inflows and outflows important?

You need to keep a pulse on your business cash flow. Positive cash flow means you're taking in more money than you're spending, which means the business can keep the lights on. Failure to maintain positive cash flow can jeopardize business growth or continued operations. 

What is positive cash flow?

The key to continued operations and growth is ensuring that the money coming in exceeds your expenses. This is called positive cash flow.

This occurs when your net cash flow, after the gain or loss of funds over a period (after debt payment), leaves a surplus.

Positive cash flow is a prerequisite for sustainable business growth.

What is negative cash flow?

Negative cash flow is when spending outpaces income. While this isn’t healthy for a mature company, many startups spend their first years in business in a state of negative cash flow.

This is because the company lives on its cash reserves until it turns a profit or manages to raise capital. This practice is called relying on your cash runway

So negative cash flows aren't all bad: startups and companies entering a hypergrowth stage need funding for their business operations. The company spends now as an investment in its future success.

As long as companies avoid excessive debt, there's nothing wrong with a short period of negative cash flow.

What is operating cash flow?

Operating cash flow is the flow of cash after accounting for operating activities and operating costs. To calculate your operating cash flow, take the cash received from sales and subtract operating expenses that were paid for in cash for the period.

It's important to know your operating cash flows because those are what appear on your company's cash flow statement and on other financial statements. Managing cash flow and performing cash flow analysis is also easier when you can clearly see how your operating costs affect your actual cash flows.

What is net cash flow?

Net cash flow refers to the final tally of cash over a period after all debts have been paid and all accounts have been settled. It's your business's net income minus its net expenses. (This final tally is sometimes called the cash balance.)

So both positive cash flow and negative cash flow are descriptors of net cash flow.

Net cash flow is a snapshot of your business's cash flow and also of your business's financial health. If you have enough cash at the end of the period, you're in good shape.

If you consistently have a positive cash flow, then your cash flow trends positive. Having more cash inflow than cash outflow signals a healthy, mature business.

What is cash flow analysis?

Cash flow analysis determines a company's current assets and capital. When the FP&A team performs a cash flow analysis, they examine and interpret changes in a company's cash inflow and cash outflow.

Sometimes this is as simple as examining a company's financial statements like the income statement or the statement of cash flows.

What is free cash flow?

Free cash flow (FCF) is the cash inflow leftover after accounting for cash outflow for operating activities and cash outflow that maintains a company's capital assets.

This kind of cash outflow includes operating expenses (OpEx) and capital expenditures (CapEx).

We'll go into some strategies to generate positive cash flows further down in the post.

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Types of cash inflows and outflows

As a business, cash flows from various sources. Let’s cover some of the primary cash outflows and inflows: 

Cash inflows

Businesses bring in money by operating (creating and selling products or services, investing (for instance, holding dividend stocks or buying bonds), and financing (receiving loans, growth equity, or venture capital funding). The cash generated from these activities is called cash inflow.

Some examples of cash inflow include net income from the sale of goods and services, sale of inventory, sale of long-term/fixed investments, and accounts receivable.

Cash outflows

The money you spend in the ordinary course of business is called cash outflow. Examples of cash outflows include: 

  • Fixed asset costs (plant and office space, equipment, etc.)
  • Production and manufacturing costs
  • Inventory and supplies purchases 
  • Marketing and advertising costs
  • Salaries and wages
  • State and local taxes

For a full walkthrough of how to read the cash flow statement and the cash inflow formula, read more in this in-depth article

How cash flows affect the cash flow statement and balance sheet

How cash inflows and outflows are reported on the cash flow statement and balance sheet depends on the type of income or expense activity. For instance, investing activities show up on both cash flow statements and balance sheets to record the movement of cash and assets into and out of the business.

Short term investments

If you purchase marketable securities such as stocks and bonds, the purchase of these would be a cash outflow. They show up as a “cash or cash equivalent” line on the balance statement

The sale of these assets (if they are sold at a gain) is reported as a cash inflow on the cash flow statement. The asset value is debited from the “cash or cash equivalents” line on the balance statement, as you no longer hold the asset.

Long-term investments

The purchase and sale of property plant and equipment (PP&E) assets require some special attention. The purchase of long-term or fixed assets shows up as a cash outflow on the cash flow statement because you’re spending money to buy the equipment. However, because those assets have value, they show up on the balance sheet under PP&E. Depreciation for those assets will show up on your financial statements like the income statement and the balance sheet

If you later sell the asset, it shows up as a cash inflow on the cash flow statement (because you’re receiving cash for the sale) and a reduction of PP&E on the balance sheet (because you no longer have the asset). 

Financing

Financing inflows and outflows refer to money moving into or out of the business from outside sources such as equity and venture capital investment, loans, stock sales, dividend payments, and debt payments.

  • Any money flowing into the business, for instance, from a financing round, proceeds of a loan you’ve taken, or interest you collect on investment, are reported as a cash inflow
  • The money you pay out, such as loan payments, dividend payments on stocks, etc., is recorded as a cash outflow. (Note that interest payments get recorded under operating activities.)

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What influences cash flow

Expenses have the biggest impact on your potential for positive cash flow. While it may take time to sell more products or land bigger funding rounds, you have immediate control of the money that flows out of the business. 

The most significant categories affecting expenses are:

Accounts receivable: Accounts receivable refers to money owed to the company by customers who buy products or services on credit. Your days receivable outstanding (DRO) highlights how long it takes to collect money from customers for an invoice. High DRO can have a negative impact on cash flow (because it’s potential income but it’s not yet accounted for in the cash flow statement). 

Accounts payable: Managing your vendor payments effectively can leave more money in the bank by allowing you to take advantage of early payment discounts and avoid paying late fees. Poor AP management may strain relationships with vendors, making it more difficult to secure good terms when you negotiate contracts. 

Wages: Human capital is one of the biggest investments most companies make. Strike a balance between salary expenses and income in order to drive growth while retaining your most important employees. 

Revenue costs: Sales and marketing are considerable expenses, but they are important to revenue growth. Take care to spend (without overspending) on things like ad spending, marketing automation, and marketing management. 

Tech stack: The use and cost of SaaS are growing by the year. Even small companies with fewer than 50 employees have an average of 16 SaaS applications in their stack. Organizations with over 1,000 use an average of 177 apps. All that tech can add up quickly and have a significant impact on your cash flows.

How to increase your business cash flow

Looking for ways to improve your cash flows? Start with these key areas:

  1. Cut costs: Find places to trim extra expenses without sacrificing growth—or quality of life in the office. You can cut costs by reducing your supply expenses, negotiating better contracts with your suppliers, streamlining your tech stack or license portfolio, and identifying other cash leaks sapping your cash.

  2. Lease over purchase: Leasing is a less expensive option for getting the equipment you need to fuel growth. With a lease, payments are smaller, so your cash goes further. Just be sure you have room in your operating budget to handle the lease payments.

  3. Negotiate early payments: You may be able to take advantage of early payment discounts with your vendors to keep a little extra cash in the bank each month. By negotiating early payment across a few recurring vendor payments, you can build cash reserves over time.

  4. Offer early pay to your customers: Reducing your DRO, incentivize customers to get payments in earlier by sweetening the deal with a discount. Many customers are happy to get a break for timely payment, and you’ll have receivables in the bank sooner without a significant impact on your revenue.
     
  5. Tighten up your terms: Accounts receivable typically operates on a Net 30 or Net 60 payment schedule. Anything longer will negatively impact your DRO. Be sure when negotiating with your customers to tighten up your terms and conditions.

  6. Use a factoring service: For very slow-paying customers (or those in non-payment status), selling the invoices to a factoring company gets money in the door for an immediate cash boost. You’ll take an average hit of 15% on the invoice cost, but you’ll realize more of that revenue without having to chase customers for the payments.

  7. Forecast your cash flow: Knowing is half the battle, and knowing in advance is even better. Take control of your cash flows by using an FP&A platform (Like Cube!) to perform cash flow forecasting. A rolling forecast allows you to make better decisions based on the most recent financial information.

Conclusion

Now you know everything you need to know about cash inflows and outflows.

Want to dive deeper into your company’s cash position? Let's talk.

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