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What is cash flow?

3-minute read

A healthy cash flow is the lifeline of your business. Get the timing right for receiving money into your business versus your outgoings, and you could flourish. Get it wrong, and you may falter. To help you understand how cash flow can affect your business, click below to watch our short video explainer. 

Key take-outs
  • Cash flow is vital to keep your business running.
  • Cash needs to flow through your business even if you’re not yet profitable.
  • Cash flow issues can have knock-on effects throughout your business.
     

Put simply, cash flow is the amount of cash going in and out of your business.

Cash going into your business includes:

  • Cash sales - which includes credit card payments.
  • Accounts receivable – people or companies you’ve sent an invoice to so they can pay you in the future. This is also known as debtors.
  • Other income such as interest, dividends, subsidies or grants.

Cash going out of your business includes:

  • Expenses such as rent, electricity, accounting fees, taxes, super and other day-to-day expenses.
  • Accounts payable, also known as your suppliers or creditors.
  • Salaries and wages.
  • Long term debt repayments, including both principal and interest repayments.


 

The cash going into your business less the money going out of your business equals your cash flow position. Your cash flow position could be one of three outcomes:

 

  1. Positive – if you consistently have positive cash flow, you can spend, invest or save your excess cash.
  2. Neutral – you have an even amount of cash coming in and going out but your ability to spend on additional expenses, save or invest is limited.
  3. Negative – this position is not necessarily bad or wrong, it simply means you’ll need to find cash to cover this gap in your business. You can put in your own money, find new equity from investors, or borrow money.

 

Ideally, you want to plan for positive cash flow for your business so can grow your business and plan ahead for times when your business might experience negative cash flow.


Read more

How to create a cash budget

Your business will always need cash to grow. Here’s a guide to producing a cash budget that could help you keep track of your cash flow and plan for the unexpected.

Options to cover cash shortfalls

It’s easy to plan for positive flows, but unexpected expenses when income slows should also be considered.

Improve your working capital cycle

How quickly does your business recover cash from its existing assets? Here’s how you could speed up your working capital cycle and give your business a boost.

Things you should know

This information does not take into account your personal circumstances and is general. It is an overview only and should not be considered a comprehensive statement on any matter or relied upon. Consider obtaining personalised advice from a professional financial adviser and your accountant before making any financial decisions in relation to the matters discussed in this article, including when considering tax and finance options for your business.