What is Cash Flow? 

In classical science, we thought in terms of a small number of basic elements, such as fire, water, wind, and air. These elements seemed to provide the foundation for all states of being, changes in environment, and disruptions. Similarly, modern businesses can sometimes isolate a few fundamental elements of business operations that seem to impact everything else. One of these critical elements of a business will usually be cash flow. Cash flow  is the inflow and outflow of money in a business. It’s usually thought of as the cash coming in minus the cash going out, with the result being either “positive cash flow” or “negative cash flow”. Positive cash flow is usually the goal of business operations. It can allow the owner of the business to reinvest in the business, settle debts, return money to shareholders, pay expenses, and provide a buffer against future financial challenges. The element of cash flow can solve problems, reduce risk, or build momentum in a business. That’s why business owners and those who work with businesses spend so much time studying and analyzing cash flow. 

As a business owner or an advisor, it is important to be familiar with cash flow and how it can affect a business. It’s not just important to business operations today – it can impact planning for the future, which may be  more critical.  Cash flow that a business generates today, and the cash flow it’s expected to produce in the future, can affect important items such as the value (sale price) of the business, risk associated with a sale or transfer of ownership of any kind, ease of bringing in or buying out owners, incentives and retention for top management, investment and capital, financial security of the business owner, and more. This is why cash flow is such an important element in operating a business.  

How is Cash Flow Measured? 

For many businesses, measuring cash flow is a pretty simple action. If you’re already an expert in assessing cash flow, that’s great. We’ll continue to share perspectives and creative uses for cash flow that may be new to you. If you are a little foggy on how to calculate cash flow, this equation may help.  

There is no magical amount of cash flow that is best, although most business owners feel that positive cash flow is preferred, and the more of it the better it is for the business. The real question is, “Will the business cash flow be enough to support the goals and objectives of the business owner(s)?” 

Projecting Cash Flow 

Once you have a handle on how you’ll think about and measure the cash flow of a business, it’s time to start projecting what you think the future cash flow of the business will be. This is where analysis turns into planning. 

Projecting future cash flow is usually a joint effort between the business owner and a qualified professional who understands cash flow. The owner is the best person to predict how income and expenses are likely to change  during the year and beyond. The analyst can then help turn those high-level trends into expected cash flow. The two can each provide a reality check to the other, anticipating times when cash flow may be  good, or  bad. 

We recommend that you create three projections: one for the best-case scenario, one for the worst, and one for the likeliest scenario. Each projection should incorporate assumptions about: 

• Customer Expectations/Policies 
• Supplier Options 
• Actions of Key Competitors 
• Profitability 
• Pricing 
• Product Lines 
• Equipment Replacement 

Once you have created each of these scenarios, you’ll have a critical element that you need to start to plan for the strategic use of cash flow to accomplish the unique goals of the business owner.  You can fill in the gaps between what is currently possible and what that business owner wants or needs from the business.