Improve your cash flow

First published 21 June 2018 • Updated 10 September 2019

Projection of cash flow

The term ‘cash flow’ describes the movement of cash into and out of your business. It’s different from both turnover (which is the total amount of revenue you generate) and profit (which is your revenue minus costs), because cash flow is specifically about the amount of money you have available to spend now. It also considers money coming in from all sources, including loans and investments, rather than just how much money you get from clients.

Problems with cash flow

It’s possible to have a thriving business and yet still have a problem with cash flow. High turnover and healthy profits are of course great goals to aim for, but if they come at the expense of cash flow you may run into difficulties. Many factors can reduce the level of ready cash you have available, such as unexpected costs, late payments from clients, or an overdrawn director's loan account. As a result your business may find it has no cash with which to settle bills, acquire new stock or pay tax. This is what we mean by a cash flow problem.

Cash flow difficulties can have severe knock-on effects, such as making you late paying tax bills and incurring fines from HMRC. In the worst cases, they may even result in your business folding despite being highly profitable on paper.

Every business needs to remember that money isn’t money until you have it in your hand. New and smaller businesses are especially vulnerable to cash flow problems, as the monthly income may be unreliable and may sometimes be lower than your outgoings. You therefore need a strategy to manage your cash flow to avoid your business becoming insolvent.

How do I calculate my cash flow?

In principle, it’s simple to calculate your cash flow. Essentially, you just need to work out what your starting balance is for the month, add on how much income you’re expecting and then subtract everything you’ll be spending that month. The final figure is your net cash flow – i.e. how much cash has come into the business. If you end up with a negative figure, it’s a warning that you’ll need to find extra cash this month to cover outgoings. Here is is as a simple equation:

Cash Flow = Balance + Income - Expense

In practice calculating cash flow can be trickier that it sounds, because the key variables (monthly income and outgoings) are not 100 per cent predictable. You will therefore need to make the best estimates you can (your accountant is probably better at this) and err on the side of caution. Various bookkeeping and accounting software is also available to help you manage cash flow.

What is a cash flow forecast?

A cash flow forecast is an estimate of the business’s cash flow over a future period – say, the next quarter or financial year. A strong cash flow forecast can be a vital tool for business planning, as it lets you know how much cash is likely to be available to deliver your plans at any given point.

For example, if you are looking to take on new staff over the coming months, or increase your marketing spend, you can feed these figures into your cash flow forecast to see if your finances are likely to cover these additional outgoings. On the other hand, if there are particular months where business tends to be slow, your forecast can factor these in so you can reduce your expenditure for those periods. In both cases you can predict potential issues before they arise and avoid cash flow problems.

A particular kind of cash flow forecasting is sometimes called cash flow modelling. A cash flow model is a forecast based on a particular future scenario or range of scenarios. For example, if you’re trying to decide between two different growth strategies for your business, cash flow models can provide you with forecasts for both scenarios, to make them easier to compare.

Why are cash flow forecasts important?

A good cash flow forecast or model can be key to business success. Not only can you reduce the risk of cash flow problems, but you can also gain the confidence you need to make longer-term plans. A cash flow forecast need not be just a warning to take care; it can provide reassurance that you will be able to afford your more ambitious business goals, and show you what you need to do to prepare for them.

On the other hand, if you don’t have a good system of tracking your cash flow, planning can become very tricky if not impossible. It can also make it harder to apply for business loans or attract investors. Solid cash flow records and forecasts are a visible sign that your business is well-run, and can pay for themselves many times over in both the benefits to your business, and the investor confidence that they inspire.

An accountant (or financial adviser with business expertise) can help you with cash flow management, forecasting and modelling.

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About the author
Nick Green
Nick Green
Nick Green is a financial journalist writing for, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.