What is cash flow?

Cash flow is one of the most critical financial metrics for small businesses, yet it’s often misunderstood. Simply put, cash flow is the movement of money in and out of your business over a specific period.

Example: A Small Business Cash Flow Scenario

Imagine Lisa runs a boutique marketing agency. She signs a $10,000 contract with a client but offers a 30-day payment term. Meanwhile, she has to pay her staff, rent, and software subscriptions, amounting to $6,000 this month. If Lisa doesn’t have enough cash on hand or other income sources, she might struggle to cover her expenses, even though she has a profitable contract.

This is why tracking and managing cash flow is essential.

How to Measure Cash Flow for Small Businesses

There are a few ways to analyze and measure your cash flow:

1. Operating Cash Flow (OCF) – This measures cash generated from core business operations. It tells you whether your business can sustain itself without relying on external funding.

   • Formula: Net Income + Non-Cash Expenses (Depreciation) + Changes in Working Capital

2. Cash Flow Forecasting – This involves estimating your expected cash inflows and outflows to ensure you don’t run out of money unexpectedly.

3. Cash Flow Statement – This financial statement provides a structured view of cash movements in three categories:

   • Operating activities: Cash from sales, expenses, and daily operations.

   • Investing activities: Money spent on assets or received from investments.

   • Financing activities: Loans, repayments, or money from investors.