Back to Basics: what is ‘cash flow’?
Have you ever had to wriggle your way out of a tight spot when you didn’t have enough cash? Maybe you were not able to take any more orders because you couldn’t afford any more stock. Or maybe sales are doing great, but it never seems like there’s any extra money in your account. If that sounds familiar, we’re diagnosing you with a case of cash flow mismanagement!
Maybe you’ve come across the term ‘cash flow’ in the past, but no-one’s ever stopped to explain what it really means. Or maybe you’re just getting started in the world of business finance and need a simple, helpful explainer. That’s where we come in.
In this guide, we’ll explain what exactly cash flow is, why it’s so important, and what it can do for your business. No jargon necessary.
What is Cash Flow?
Cash flow is just the money moving in and out of your business over time. Yes – it’s that simple!
To grow your business, you’ll want more money coming in than going out. This is called positive cash flow, which leaves you with more money to reinvest in your business. You might use these profits to pay for special equipment, like a stand mixer for an online bakery, pay salaries or create an emergency fund in case of slow seasons.
On the other hand, negative cash flow means you’re paying more money out than you have coming in. That’s an overall loss for your business, and it’s not sustainable. You might find yourself running out of money to pay suppliers, or losing customers when you can’t order enough products quickly.
Even profitable businesses can struggle with cash flow if they’re not being paid on time: it’s not just about sales, it’s about how you manage your profits and getting paid. The key to creating a healthy cash flow (and developing the means to grow your business) is higher income, and lower expenses.
Now it’s time to learn how to put this into practice for your business.
Three Simple Tips to Manage Your Cash Flow
Tip 1: Track your cash flow every week. Track all the money coming in and going out every week – that’s your business sales and expenses. Reviewing this list will help you keep track of your cash flow and spot any problems.
Alternatively, CloudFO can automatically track and display of your sales, incomings and expenses/outgoings, and give you regular updates on your cash flow. It flags any problems so you can catch them early.
Tip 2: Separate your personal finances and your business finances. Make sure you create a dedicated business bank account - if you're constantly using your personal savings to fund your business, it's hard to know if your business is sustainable.
Once you connect your business bank account to CloudFO, you can monitor your transactions, sales and much more in a dedicated Dashboard. CloudFO is compatible with many major banks and accounting apps like Xero, Revolut and Santander, to name a few.
Tip 3: Have a plan for slow seasons. The post-winter drop in sales can hit small e-commerce businesses hard if they're not prepared. When holiday sales spike, saving a portion of the profits can help your business survive during the slower months.
CloudFO can provide handy tips on how to improve your saving and spending habits – and our other blog posts also explain why mastering cash flow benefits your business. CloudFO gives you a view of your Cash runway which is how long you can operate as you are without running out of cash.
How Can Cash Flow Help My eCommerce Store?
Cash flow really does impact every area of your business, from marketing to inventory management. Positive cash flow means you have enough cash on hand for last-minute ad campaigns, or enough money to purchase extra stock if your product is selling like hotcakes. Having a healthy cash flow gives you flexibility and financial security. You can sleep well at night when you trust that your business can handle whatever life throws at it.
At CloudFO, we aim to make your life stress-free. That's why we developed our AI finance colleague, to monitor your finances and keep you updated, so you don't spend precious time listing sales and expenses. CloudFO the AI CFO can automate dreary tasks in seconds while you work on your business – which is what you wanted to do all along!
Our colleague comes equipped with many useful tools - including a weekly finance review, detailed monthly reports, up-to-date statistics, info-packed blog posts, have a friendly conversation with CloudFO using the chat feature to answer those late-night questions.
You don’t need to be a financial expert to get a handle on your cash flow. CloudFO is the perfect tool for e-commerce businesses – and it’s beginner-friendly too!
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