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Introduction to cash flow management: prepare and strategise for all scenarios with better cash flow knowledge and forecasting

net income, positive net cash flow, fixed assets, operating expenses, cash generated, cash flow from operations

Cash flow. It will make or break your business.

According to a 2020 U.S. Bank study, 82% of businesses fail due to poor cash flow management.

When you’re on top of your cash flow, your business fires on all cylinders – seamless operations, growth, and the ability to strategise for a variety of scenarios.

With 60% of SMEs admitting to having limited accounting and finance knowledge, it’s hardly surprising that businesses are getting in a muddle with their cash flow.

It doesn’t have to be like this. Through understanding, analysis, and prediction of your cash flow, you’ll unlock the ability to make informed decisions of when to spend, when to save, and when to borrow.  

In this article we’re going to address the core principles behind cash flow – providing all you need to know about your cash flow statement, net cash flow calculation, and the key differences between net cash flow, net income, and profit. We’ll also investigate FAQs on free cash flow, forecasting, plus common cash flow issues you may encounter and the solutions to combat them.

If you aren’t already savvy about your business’ cash flow, it’s time to read on, sharpen-up, and avoid the worst of the common SME cash flow woes.

Table of contents

Cash flow basics

Cash is continuously flowing in and out of your business.

Any money moving into your business is known as cash inflow. This could be anything from selling stock and services, earnings from investments to cash injections from loans.

Money moving out of your business is known as cash outflow. Examples of outflow are purchasing inventory, paying staff, rent, operating costs and so on.

Cash flow is the rate that these inflows and outflows pass through your business over a specific period (known as the accounting period).

  • Positive cash flow is when the amount of cash moving in is greater than the amount moving out over a specific period. You’re generating more than you’re spending.

  • Negative cash flow is when the amount of cash moving out is greater than the amount moving in. You’re spending more than you’re generating.

Understanding the cash flow statement

The cash flow statement (CFS) is a financial summary of the movement of cash and cash equivalents (CCE) that enter and exit your company. Cash equivalents are short-term (3 months or less) investments that can be readily turned into cash – they’re highly liquid and easily sold.

The cash flow statement demonstrates your business’ financial ability to operate in the short and long term – how much cash, or liquidity, is available for the company to fund its operating expenses, pay its debts, and to grow.

Typically, your CFS is broken down into 3 components:

  • Cash from operating activities (CFO)– capital generated and used by your business’ core operations.

  • Cash from investing activities (CFI): capital generated by profitable investments, or cash issued to make an investment or purchase fixed assets.

  •  Cash from financing activities (CFF): capital generated through interest on debt agreements, or cash that’s been issued to pay off debts or pay out dividends.

Through analysis of your cash flow statement, you can see how much each activity is performing in terms of generating cash.

Check out our free cash flow statement template

Net Cash Flow (NCF)

NCF is a key marker of your business’ ability to survive and grow – it represents either the gain or loss of funds by your business over a specific period.

Sustained periods of positive cash flow are a strong signal that it’s a good time to invest in growth, whereas continued periods of negative cash flow signify issues that need to be urgently addressed to avoid bankruptcy.

To calculate NCF you take the amount of total cash received (inflow) and subtract the total sum of money spent (outflow) by your company over a specific period.

NCF only concerns the money that physically moves in and out during the accounting period – it doesn’t include capital in the bank, any credit owed to you, or money you owe to your debtors.

Therefore, inflow must have been already paid to the company, so for example, an unpaid invoice is excluded from the calculation. Likewise, outflow doesn’t include any liabilities that have not already been met.

Net cash flow is the sum of these two amounts, and it must trend positive or else your business will eventually become insolvent. Bankrupt. Caput.

How to calculate net cash flow formula

In its most basic formula, NCF is straightforward to calculate. All you’re doing is working out the difference between your business’ cash inflows and outflows:

Net cash flow = total cash inflows – total cash outflows

However, you can separate cash flow by the categories on your cash flow statement to perform a more detailed calculation:

Net cash flow = cash flow from operations + cash flow from investing + cash flow from financing 

Simply select the period that you want to do the calculation for, extract the information from your cash flow statement, and enter the figures into the net cash flow formula.

NCF example

Jay of Zig Zag trading wants to work out the NCF of his company for the month.

 From his cash flow statement:

·   Cash flow from operations:    £90,000

·   Cash flow from financing:      £30,000,

·   Cash flow from investments: -£15,000

NCF: £90,000 + £30,000 - £15,000 = £105,000

Jay’s company has a positive net cash flow of £105,000 for the month.

This confirms that Zig Zag trading is financially healthy and has the capital to buy such things as inventory, pay off debt, or invest into a marketing campaign. 

It’s interesting to note that Zig Zag’s cash flow from investments is in the negative - this may be due to investing heavily in equipment or assets needed for growth which would in turn create greater NCF in the future.

NCF pros

NCF allows insight into your business’s short-term financial viability:

·       Consecutive positive NCF is of course, a very healthy sign and signifies that it’s a good time to start planning what to do with the extra cash flow.

·   Consecutive negative NCF limits your company’s ability to invest back into the business. Negative NCF is a red flag - you must determine ways to improve cash flow such as chasing late payments, applying for loans, improving operational efficiency etc.

·   NCF is important when determining the payback period of a potential investment and making decisions in general about the future.

NCF cons

Although NCF can be a great indicator of your company’s financial health, when used on its own it can conceal a few hidden truths depending on the accounting period you are looking at:

·       Positive cash flow can also occur due to an injection of capital via taking on a debt. The debt may not be healthy and have significant negative impacts to your finances down the line.

·   Negative cash flow from investments may be due to significant spending on an investment that’s going to boost your revenues in the future.

Net cash flow, net income, profit – what are the differences?

For your average Joe, NCF, net income and profit may all seem very similar and be used interchangeably. However, in the world of finance they each have very specific definitions.

Whilst they can all refer to the excess of cash generated over expenses, their contextual usage and way of determining them differ in very significant ways.

Net income

Net income, confusingly also known as net profit or net earnings, is a single figure representing the bottom line of your business’ earnings on your income statement. It is a form of profit.

Net income is determined by several calculations that ring all expenses and income streams for a given accounting period together.

It is the total of all income less all expenses. For example, net income would include expenses from manufacturing products, operating expenses, interest paid on loans, depreciation and amortisation of assets, taxes, revenue from sales or accrued from investments, plus all additional income streams from subsidiary holdings or the sale of assets - even one-time payments for unusual events.

Net income encompasses everything and comprehensively reflects your business’ profitability - it’s the figure used to calculate a publicly traded company’s earnings per share (EPS).

It is worth noting that manipulative accounting practices can improve the net income value by aggressive revenue recording and hiding expenses.


In contrast to net income that encompasses all revenue and expenses for your company, profit is the revenue that remains after specific expenses have been deducted. You are calculating profit at several stages.

By calculating profit at several stages within a business, you can determine which expenses from which areas are having the biggest hit on your bottom line.

  • For example, gross profit, also known as gross margin or gross income, is revenue minus the cost of goods sold (COGS). 

  • On the other hand, operating profit is revenue minus COGS and operating expenses – all expenses, both fixed and variable, that are needed to keep your business running must be included.

What are the key differences between net income, profit and NCF?

Profitability (net income and profit) and NCF are all signs that you have a healthy, thriving business. However, the key differences are the way revenue and expenses are recorded.

Cash flow is concerned with the inflows and outflows of money into the business over time. Profit, in contrast, is the amount of money that remains from your sales revenue after all expenses have been subtracted.

A key difference is that revenue may be recorded as profit at the time of sale, however that same sale may not be recorded in cash inflow until the invoice is paid, which may be significantly later than the sale – a common problem for many businesses. In this instance, it’s recommended to develop optimised payment systems and explore raising capital with smart loans.

A business can be profitable and yet not have enough cash to survive. On the other hand, a business with a strong positive net cash flow can survive despite not making a profit.

Cash flow FAQ

What is free cash flow?

Free cash flow (FCF) is the amount of cash generated from your core business activities minus capital expenditures (long-term fixed assets) such as equipment, software, machinery, or real estate.

Free cash flow is very useful for working out:

·   How effectively your business can generate cash from your core business activities

·   The impact your capital expenditures have on cash flow

Investors and analysts often use free cash flow to determine whether your company has enough money to repay creditors, buy back shares, and issue dividends.

To calculate your free cash flow is really quite simple. Perform or obtain your operating cash flow calculation and subtract your long-term capital expenditures:

Free cash flow = operating cash flow – capital expenditures

What is cash flow forecasting?

Cash flow forecasting is exactly what it says on the tin – a process that estimates the flow of cash in and out of a business over future time periods.

A cash flow forecast can be done for the short, medium, and long terms. If done accurately, the forecast will help you predict your future cash positions for various scenarios.

In short, a cash flow forecast can:

·   Predict your cash flow for the year ahead and help you plan accordingly. You can see which months are likely to see a deficit, and which months will see a surplus. 

·   Determine whether your business is performing as expected. You can compare your forecast to your actual income and expenses - simultaneously identifying the areas of business that are excelling or falling short.

·   Help you budget for large purchases, to invest in growth, and identify the need for a business loan.

·   Be adapted to run through various growth strategies to test the impacts on your cash positions.

·   Test best and worst case scenarios – prepare growth or coping strategies for when trading is better or worse than projected.

By forecasting your cash flow, you maximise your growth potential and avoid running out of cash, becoming insolvent.

What are the most common cash flow problems within a company?

There are a myriad of reasons as to why a company might experience cash flow problems. Here is a quick run-down of a few of the most common:

- Outstanding receivables - Low profit margins - Redundant inventory - High Overheads - Poor business growth strategy - Lack of a cash reserve or access to funding

How can I increase my company’s net cash flow?

Increasing your cash flow starts with analysis and identification of the areas within your business that are heavily consuming your cash, or equally, not creating cash. In relation to the causes of cash flow problems listed above, here are some potential solutions:

- Get paid quicker

- Increase your profit margins

- Improve inventory

- Cut your overheads

- Develop growth and survival strategies

- Access to cash for when you need it


It’s a no-brainer. If you want to maximise the success of your business, cash flow analysis and forecasting should be at the forefront of your agenda.

Decipher your cash flow issues, implement effective strategies, and manage your cash effectively to ensure the success and growth of your business. 

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