What is Cash Flow?

Cash Flow Basics

What is cash flow? It is the term used for when money flows into a business and flows out again – hopefully more money flowing in that out!

This page explains the cash flow basics.

What is Cash Flow

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Have a good flow of money coming in to the business 

Have good control of where the cash is flowing out to 


By gaining new customers, providing customer satisfaction; staying on top of accounts receivable with good debt collection strategies

Have a budget in place, stick with it, avoid reckless spending

Where Does the Cash Come From?

Here is a list of activities that are the source of funds for a business. Next to each is the name of the financial report that these activities are found on. 


  • Sales payments from customers for goods or services
  • Pre-payments/deposits from customers for goods or services in advance
  • Funds received from a loan provider
  • Funds introduced by the owner/s (Capital)
  • Interest earned on savings or investment accounts
  • Income tax refunds
  • Payments by shareholders


  • Profit and Loss

  • Balance Sheet
  • Balance Sheet
  • Balance Sheet
  • Profit and Loss
  • Balance Sheet
  • Balance Sheet

Where Does the Cash Go To?

Here is a list of activities that the cash is used on.


  • Stock purchases
  • Asset purchases
  • Wages and salaries
  • Sales tax payments
  • Income tax payments
  • Payroll taxes
  • Funds taken by the owner - drawings
  • Loan Repayments
  • Interest on loans or bank overdrafts
  • Operational expenses such as rent, power, vehicle expenses, repairs and maintenance…. the list can be long


  • Balance Sheet
  • Balance Sheet
  • Profit and Loss 
  • Balance Sheet
  • Balance Sheet
  • Profit and Loss
  • Balance Sheet
  • Balance Sheet
  • Profit and Loss
  • Profit and Loss

The above lists give the bookkeeper a clue as to where in the accounts they should be coding these transactions when entering their daily information into bookkeeping software.

This information will help the bookkeeper calculate a budget for the year, and a cash flow statement.

Where is the Cash?

A company that has a fabulous net profit on their Income Statement may not necessarily have a great cash flow, in other words – no money in the bank.

For example, their net profit might by $20,000, but the cash in the bank might only be $500. Why is that?

To work it out, just look at the Balance Sheet and dig deeper into the following areas:-

Inventory – is the business purchasing and holding too much stock? (cash tied up in stock) 

Assets – has the business been purchasing a lot of assets like vehicles, furniture, plant and equipment?

Accounts Receivable – does the business have a lot of money owed to it by customers? 

Loan Repayments – does the business have loans that they are making monthly repayments on?

Drawings – is the business owner taking a lot of funds for personal expenditure?

Tax – did the business have to pay sales tax and/or income tax?

Bank – is the bank account running in overdraft?

Check Cash Flow 

Regularly checking the cash flow (like once a month) can help a business work out which areas of operating they need to make changes on to improve the cash flow – such as brain storming ways in which to make more stock sales, encouraging the owner to decrease their spending habits, and so on.

Bad cash flow can kill a business.

It is possible to forecast cash flow months ahead of time so that the business can take action now if they see the cash is probably going to be short in a few months..

What is Cash Flow Forecast?

This is a spreadsheet that can show:-

  1. the actual transactions that have occurred in the current reporting period 
  2. the forecast transactions for the months ahead, these are taken from the budget 
  3. the forecast totals are a result of the sum of the above

What is Cash Flow vs Budget?

What is the difference between a cash flow and a budget?

  • Cash flow is the term for describing where payments received into the bank have come from and what those funds were spent on
  • A budget is a financial plan that a business makes to decide how to allocate their earnings on all the different types of expenses 
  • A cash flow statement has opening and closing balances at the beginning and end of each month or reporting period 
  • A budget does not carry forward cash balances, it just has static totals
  • What happens in one month of a cash flow will affect the totals carried forward in the remaining months
  • A budget has a list of static numbers that are not affected by the previous month’s activities

When a business sets up their cash flow forecast spreadsheet, they should first set up a budget.

What is Cash Flow Formula

What is the Cash Flow Formula? It is a formula for quickly calculating a ratio to help a business see if they have enough funds to cover their expenses – this is useful for larger, corporate type companies. 

Check it out here.

What is a Cash Flow Form?

However, there is another simple way that small businesses can work out their immediate cash flow using an excel cash flow form.

This is ideal if cash is really tight and the small business has to monitor cash flow day to day to ensure they can pay off overdue bills, make money available for expected bills in the next few weeks, and cover wages.

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What is Cash Flow

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