What Is Cash Flow and How Do You Manage It

What is Positive Cash Flow?

Positive cash flow is when more cash is coming into a business than going out, which typically signifies strong financial health.

What is Negative Cash Flow?

When money outflows exceed inflows, we call it negative cash flow. Having negative cash flow can indicate a problem with finances, be a sign of excessive investment, or reflect strategic growth investments.

• Operating Activities Cash Flow

Operating activities cash flow is the money a company makes or spends on its main business activities. This type of cash flow is essential to understand whether a company can run its day-to-day operations with the cash it generates from it.

For example, if a bakery spends $6,000 on ingredients, wages, and rent for its cakes and sells them for $10,000, the bakery is said to have positive operating activities cash flow.

• Investing Activities Cash Flow

Cash flow from investment activities is the money an organization makes or spends on purchasing or selling long-term assets, like equipment, property, or investments.

• Financing Activities Cash Flow

Financing activities cash flow is related to the funding a company or start-up raises to operate and the repayment of those funds and shows how the organization manages its capital structure.

For example, borrowing money or raising funds and issuing shares.

Formulas for Cash Flows: Cheat Sheet

The two most used formulas to calculate cash flow are the cash flow formula and the operating cash flow formula.

Free Cash Flow Formula

Operating Cash Flow – Capital Expenditures

Operating Cash Flow Formula

Net Income + Non-Cash Expenses (Depreciation) + Change in Working Capital – Cash Taxes

How To Manage Cash Flow In Business

These are a few ways to manage your business’ cash flow effectively to ensure good financial health and growth.

• Monitor Cash Flow Regularly

Monitoring your cash flow regularly is essential to know what’s happening in your business. After all, what isn’t measured can’t be improved. To stay on top of it, consider using cash flow statements to forecast and track the movement of money in and out of your business.

Alternatively, businesses can use ERP systems like Xledger to track cash inflows and outflows in real-time.

ERP is business software used to manage, track, automate, and integrate core business processes essential to their operation. The software’s live dashboards enable automated cash flow reporting and provide seamless insights into bank balances and expenses.

• Forecast Future Cash Flow

Forecasting your cash inflows and outflows is just as important as monitoring them. By staying ahead of the curve, your organization will be able to better plan for the future and ensure that cash is appropriately allocated. Typically organizations project cash flow 3 to 6 months ahead by using previous data and considering future spending plans.

Cash flow forecasting is another area where ERP implementation might come in handy. Xledger’s built-in cash flow forecasting tool integrates financial plans and budgets into the forecasting module. Making it easy for CFOs and accounting teams to project and adjust on the go. Xledger automatically updates projections in real-time based on transactions.

• Manage Expenses

Effectively managing your business expenses is the third ingredient in the formula for healthy cash flow. To do this, you’ll want to make sure your organization’s expenses are properly tracked and up to date as well as setting budget limits for your organization’s departments.

The most effective way to do this is by using ERP software to automate expense tracking via electronic uploads of receipts or credit card statements. ERPs can be configured to alert your organization leaders when a limit is near or crossed, and automatically factor in current expenses for forecasting and monitoring.

• Accounts Payable and Receivable

Last but not least, making sure you have proper control over both your accounts payable and receivable is essential to effectively managing cash flow in your business.

ERPs are also exceptionally effective in this area by helping business owners and operators to automate invoicing and follow ups as well as streamlining your AP and AR process.

Using Finance Automation Software to Manage Cash Flow

Managing cash flow effectively is critical to understanding your company’s financial health and sustainable growth. There’s no better way to do it than leveraging ERP tools like Xledger has to offer.

By implementing cloud-based ERP software like Xledger, your business can automate cash flow tracking, improve forecasting accuracy, and help maintain optimal liquidity to fund your business operations.

At Xledger, we empower ambitious businesses to control their cash flow with cloud-based ERP automation. Our platform integrates real-time data from your accounting, banking, and expense systems to provide a clear, up-to-date view of your cash position. With tools for cash flow forecasting, scenario planning, and expense tracking, Xledger helps you predict challenges and optimize working capital.

Free your finance team from the burden of manual cash flow management. Book a free one-on-one demo to discover how Xledger can automate your cash flow processes and keep your business financially agile.

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