What is cash flow?
Cash flow is the movement of money into and out of a business over a period, showing whether it has enough cash to pay its bills.
What cash flow means
Cash flow tracks real money: customer payments arriving in the bank, and wages, rent, suppliers, tax and loan repayments going out. If more comes in than goes out in a period, cash flow is positive. If more goes out, it is negative and the bank balance falls.
It is usually split into three parts: operating cash flow from day-to-day trading, investing cash flow from buying or selling equipment and other assets, and financing cash flow from loans, owner investment and dividends.
Cash flow vs profit
Profit is worked out on an accruals basis: a sale counts when it is made, not when it is paid. Cash flow counts only money that has actually moved. So a business can be profitable on paper while its bank balance shrinks, because customers have not paid yet, stock has been bought in advance, or a large VAT or tax bill has fallen due.
Example
A recruitment consultancy places candidates worth £30,000 of fees in March. Clients pay on 60-day terms, so the cash arrives in May. Meanwhile it pays £18,000 of salaries and £4,000 of overheads in March and a £9,000 VAT bill in early May.
| Month | Cash in | Cash out | Net |
|---|---|---|---|
| March | £12,000 | £22,000 | (£10,000) |
| April | £14,000 | £22,000 | (£8,000) |
| May | £30,000 | £31,000 | (£1,000) |
The firm made a healthy profit in March, yet it needed £19,000 of cash to get through to May. Without a forecast, that gap arrives as a surprise.
Why it matters for your business
Cash pays the bills, so cash flow decides whether you can pay staff, suppliers and HMRC on time. A rolling 13-week or 12-month forecast shows shortfalls before they happen, giving you time to chase debtors, delay a purchase or arrange funding on good terms instead of in a hurry.
How to improve cash flow
- Invoice on completion and offer easy ways to pay
- Take deposits or use proforma invoices for large jobs
- Agree longer terms with suppliers
- Keep stock lean
- Set aside a percentage of every sale for VAT and tax
- Spread large costs with finance rather than paying from cash
Common questions
Usually because customers owe you money, you have bought stock or equipment, you have repaid loans or taken dividends, or a large tax bill has been paid. None of these change profit in the same way they change cash. Comparing your profit and loss with your bank movements shows where the money has gone.
A month-by-month or week-by-week projection of the cash you expect to receive and pay out, giving an expected bank balance at each point. It highlights future shortfalls so you can act early. Banks and investors often ask for one.