Cash flow is a measure of how much cash a business brought in or spent in total over a period. Cash flow is typically broken down into cash flow from operating activities, investing activities, and financing activities on the statement of cash flows, a common financial statement.

An up-to-date cashflow statement will help you determine what you actually have available as excess funds in your bank account.

The balance figure you see is not always available cash!

Everything your business does should be included in your cashflow, everything coming in or waiting to come in as well as everything going out or due to be going out.

Some businesses like to separate out from the main bank account the monies that are already spoken for – lets look at some examples:

Example 1

Acey Communications Ltd has a current account with £2000 balance.  One of the directors has checked the current account and is happy that there are enough funds to buy a new laptop costing £1500.  BUT the management accounts show that HMRC is owed £1000 so this amount should be in the deposit account, therefore there is only £1000 available to spend.  This is a trap that many businesses fall into in the early stages of trading.

Example 2

Acey Weddings & Events Ltd has a bank balance of £50,000. The directors want to pay themselves a dividend and are deciding how much.  The balance sheet shows them that clients of Acey Weddings & Events Ltd have paid deposits for future dates of £32,000.  This amount should be “ring fenced” until the date of the event has passed, and the company has provided the service.

Example 3

Acey Gardeners Ltd has an insurance bill due.  They have accrued for the cost in their management accounts but have forgotten to include the accrual in their cashflow, therefore the bill will impact the cashflow when it becomes due.  If the monthly amount had been extracted from the cashflow and “put aside” there would be no sudden rise in amounts leaving the bank.

A simple way of operating your cashflow on a daily basis is to transfer to a deposit account all monies owed to suppliers etc. Such as HMRC for VAT & PAYE.  It is also good practice to accrue for annual bills like Insurance or better still pay it by Direct Debit on a monthly basis.