Cash flow

Cellstudy™ in association with the Tax Academy™

In the previous two articles I have covered the ‘Profit and Loss Account’ and ‘Balance Sheet’. Cash flow is the ‘glue’ that links these financial statements together. Cash flow is essentially the money that is flowing in and out of your business.


Cash in

Cash (cash/BACS payments/bank transfers etc.) comes from customers or clients who are buying your products or services. If customers don’t pay at the time of purchase, they will represent money that is owed to the business. In the Balance Sheet this is known as a Trade Debtor/Account receivable. It is important to monitor how long your customers/clients are taking to pay, as this could have an adverse impact on your cash flow.


Cash out

Cash is going out of your business in the form of payments for expenses (Profit and Loss Account), capital equipment (balance sheet), loans (balance sheet).


Net cash flow

This is the difference between cash in and cash out.


Positive cash flow

This is where more money is coming into the business than is being paid out.


Negative cash flow

This is simply where more money is going out of the business than is coming in. In order to balance your cash flow you may well have to borrow funds and, for instance, use a bank overdraft.



A business that typically cannot pay its creditors as they fall due (and typically this will be employees and suppliers) is insolvent. This is reflected typically on the Balance Sheet when current liabilities exceed current assets together with a negative Balance Sheet ‘footing’. The decision for the business owners is then very ’stark’ – find more cash or terminate the business.


The importance of managing cash flow

Insufficient cash within a business is one of the primary reasons a business fails. There is an old saying ‘Turnover is vanity BUT cash is reality.’


Starting a business

When preparing your Business Plan it is very important to prepare a cash flow statement. There will normally be a cash requirement to ‘kick-start’ your business, and this may take the form of funds introduced into the business yourself or through third party funding such as banks.

A High Street shop will be predominantly a cash business, but for instance a consultancy business may require you to invoice the client. It is imperative that when you first engage with clients you have Terms of Business between yourselves and that payment terms are properly annotated.

It is also important that you monitor your trade debtors (people that owe you money) as they well be struggling for cash themselves and try to stretch your payment terms.


Is your business a seasonal business?

Cash flow is particularly important for a seasonal business – those businesses that have a large fluctuation of business at different times of the year, and it is important to reflect this within your Business Plan.


Cash flow v income

Investors in your business care deeply about cash flow as it is the ‘life blood’ of the business. However, income and profit are based on accrual accounting principles, which essentially smoothes out expenditure and matches income to when a product is sold or delivered. Due to Accounting Standards this can mean that a company’s net income or net earnings can be significantly different from the underlying cash flow. This is why Cash Flow merits its own statement alongside the Balance Sheet and Profit and Loss Account.


Cash flow tips

  • Agree terms of payments with clients prior to supply of services;
  • Review your pricing structure, particularly against the costs incurred in providing a service/product;
  • Obtain better deals with suppliers and improved payment terms;
  • Get online banking!
  • Control your trade debtors – money owed to you – review this list weekly;
  • Review what your business owes to your suppliers/HMRC etc. to monitor your business outgoings;
  • Use weekly/monthly cash flows to forecast cash demands;
  • Keep up-to-date accounting records;
  • Remember … ‘no cash no business’.