One of the most important skills that any small business owner can have is the ability to measure cash flow. By calculating your company’s cash flow and using this to plan your business activities, you’ll be in a position to make wise commercial decisions and keep an eye on your company’s financial health. Here is a quick and easy guide to measuring cash flow in your business.
What Cash Flow Really Is
Your company’s cash flow is not that different to your personal finances: you start the month off with a certain amount of money, and during the course of the month you earn and spend a certain amount too. If all goes well, you’ll spend less than you earn and end up with a surplus, but of course it’s also possible that you may spend more than you earn and end up in the red.
Calculating Your Cash Flow
- Your monthly starting balance is the amount of cash the business has available at the beginning of each month. This is the first amount you’ll need to calculate your cash flow.
- Cash In is the total amount of cash that the business receives in a given month, from sales, receivables, interest, or any other source of revenue.
- Cash Out is the amount of cash which the company pays out each month on expenses, whether they are fixed (like rent or salaries) or variable (like cost of sales).
- Ending Cash is equal to Starting Balance + Cash In – Cash Out. You will need to compare this figure to your starting balance to assess your cash flow. If this amount is positive, you have a positive cash flow. If not, your cash flow for the month is negative.
For example, if your business began the month with R10 000 in the bank and received a further R10 000 in revenues while paying out R5 000 in expenses, your cash flow would equal R10 000 + R10 000 – R 5000, or R15 000. This amount is R5 000 more than your starting balance of R 10 000, meaning that your business experienced a positive cash flow of R5 000 for the month.