Jake Ballinger
FP&A Writer, Cube Software
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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 financialreporting. 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. 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 leaves a surplus after the gain or loss of funds over a period (after debt payment). Positive cash flow is a prerequisite for sustainable business growth.What are cash inflows and outflows?
Why is tracking cash inflows and outflows important?
What is positive cash flow?
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 with negative cash flow.
The company lives on its cash reserves until it profits or raises 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 the operating expenses paid for in cash for the period.
It's essential to know your operating cash flows because those appear on your company's cash flow statement and other financial statements. Managing cash flow and performing cash flow analysis is also easier when you can 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 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. You're in good shape if you have enough cash at the end of the period.
If you consistently have a positive cash flow, then your cash flow trends are 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.
Cash flow analysis can also be forward-looking. In these cases, FP&A teams find value in creating a pro forma cash flow statement against which to measure their current projections.
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 cash outflow includes operating expenses (OpEx) and capital expenditures (CapEx).
In the post, we'll develop strategies to generate positive cash flows.
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 income or expense activity type. For instance, investing activities appear 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, purchasing these would be a cash outflow. They appear 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 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.)
What influences cash flow
Expenses have the most significant impact on your potential for positive cash flow. While it may take time to sell more products or land bigger funding rounds, you can immediately control 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 harm 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 negotiating contracts.
Wages
Human capital is one of the biggest investments most companies make.
Strike a balance between salary expenses and income to drive growth while retaining your most important employees.
Revenue costs
Sales and marketing are considerable expenses but are nonetheless essential to revenue growth.
Take care to spend (without overspending) on ad spending, marketing automation, and marketing management.
Tech stack
The use and cost of SaaS aregrowing 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 significantly impactyour cash flows.
How to increase your business cash flow
Looking for ways to improve your cash flows? Start with these key areas:
Cut costs
Find places to trim extra expenses without sacrificing the office's growth or quality of life.
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.
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.
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.
You can build cash reserves by negotiating early payments across a few recurring vendor payments.
Offer early pay to your customers
Reducing your DRO, incentivize customers to get payments 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.
Tighten your terms
Accounts receivable typically operate on a Net 30 or Net 60 payment schedule. Anything longer will negatively impact your DRO.
When negotiating with your customers to tighten up your terms and conditions.
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.
Forecast your cash flow
Knowing is half the battle, and knowing in advance is even better. Take control of your cash flows with 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.
