Cash flow is a measurement of the amount of cash that comes into and out of a business in a given time frame. It’s critical to business operations, essentially determining the amount of money a business has available to pay suppliers, employees, and lenders or invest in growth.
Cash flow can be positive or negative. Positive cash flow means more money is coming into the business than leaving it. Negative cash flow means the opposite – that more money is leaving the business than entering.
Since cash flow influences working capital or the amount of money a business has to fund its day-to-day operations, businesses tend to aim to generate positive cash flow in most circumstances.
Sustained periods of negative cash flow prevent businesses from being able to cover their expenses, which can become an existential problem. In fact, cash flow problems are one of the most common reasons for business failures.
Types of cash flow
Cash flow is made up of three main components, which represent the major centers of both revenue and expense. They are:
Cash flows from operations (CFO): Operating cash flow is calculated by subtracting the costs of developing, producing, and distributing products or services from the revenue generated by selling them.
Cash flows from investing (CFI): Investing cash flow is calculated by subtracting the amount of money invested in company growth or assets from the revenue generated in the form of investment returns.
Cash flows from financing (CFF): Financing cash flow is calculated by subtracting the costs of financing arrangements (e.g. interest or dividends) from the amount of money generated through financing.
Generally speaking, businesses aim to generate most of their cash flow from operations, which is more sustainable over the long term. However, if businesses seek quick growth, it’s not uncommon for cash flows from financing to increase.
Why cash flow is important
Cash flow is of huge importance to all businesses, primarily because positive cash flow is required to meet day-to-day financial obligations like paying suppliers and employees.
Without sufficient cash flow, businesses are unable to pay their bills and, by extension, will face serious operational difficulties.
However, cash flow’s importance is also related to a business’s ability to pursue opportunities for growth. Generally speaking, growth-minded businesses will need to have excess cash to spend on more stock, additional equipment, or research and development.
So effective cash flow management isn’t just important for businesses hoping to survive, it’s also critical in terms of enabling them to thrive.
How cash flow is measured
To manage cash flow effectively, businesses need to be able to measure and analyze it. In the simplest terms, cash flow measurement is carried out using the following formula:
Cash flow = Total cash inflow – total cash outflow
However, most businesses will use more sophisticated measurement processes to get better, more meaningful cash flow data.
To begin with, cash flow measurement is usually limited to a specific time frame, like a financial year or quarter. It’s typically conducted in a cash flow statement, which allows finance teams to track all inflows and outflows in the relevant period.
This cash flow statement can also break cash flows into the three types mentioned above, providing greater visibility over where money enters and leaves the business.
Many businesses use dedicated cash flow software integrated with their enterprise resource planning (ERP) system to handle cash flow measurement. This software can provide more accurate analysis and also provides opportunities for automation, which reduces the amount of time spent measuring cash flow.
Forecasting future cash flow
As well as measuring cash flow in previous business periods, businesses also aim to predict future cash flow. Cash flow forecasting estimates the expected flow of cash coming into and out of a business in a given time period, from a month to years ahead.
This is an important consideration for businesses looking to maximize their cash flow management strategy.
Firstly, it provides valuable insights into what they can do to optimize cash flow in the near term. If a business forecasts cash flow for the month ahead and realizes there will be a surplus, for example, it can use that money to invest in growth.
It also illuminates potential cash flow risks, like projected periods of negative cash flow that could cause working capital issues. This is particularly important for businesses that are aiming to build resilience, which is critical in challenging business environments.
5 ways to manage cash flow
Businesses can see many benefits from improving their approach to cash flow management, creating resilience against risks, and opening up growth opportunities. These are some of the most common ways to increase cash flow management performance:
Optimize accounts receivable and accounts payable
Accounts receivable (AR) and accounts payable (AP) — representing money owed to a business by its customers and money a business owes to its suppliers — often make up a meaningful percentage of its total capital. Changes to how both accounts are managed can offer cash flow boosts.
On the AR side, businesses can use solutions like accounts receivable financing to collect payments more quickly without impacting their suppliers’ working capital positions. For AP, there are a range of solutions, including dynamic discounting and supply chain finance, that allow businesses to preserve their own working capital for longer.
Adopt a suitable inventory management strategy
Businesses often have a significant amount of cash tied up in raw materials or inventory, so inventory management can be used as a lever to increase cash flow. There are a range of different inventory management strategies to consider, each offering a different balance of inventory and working capital availability.
The key is to adopt an inventory management strategy that ensures the business can continue to meet all customer demand within target order fulfillment boundaries while minimizing any surplus inventory above this point to maximize working capital availability and cut inventory carrying costs.
Streamline operations for efficiency
Standard operations within a business all have associated costs, and increasing the efficiency of the processes can reduce that cost, which can in turn impact cash flow. There are lots of ways to approach streamlining operations, but integrating automation is a particularly popular option.
A variety of operations can be automated, either in part or in full, through dedicated tools like accounts payable automation platforms. These solutions don’t just improve efficiency, they can also result in fewer errors and increased accuracy.
Improve cash flow forecasting capabilities
Improving the accuracy of cash flow forecasting or adopting a more rigorous approach that involves creating forecasts on a regular basis can help businesses better identify upcoming opportunities or threats.
This means they’ll be better able to make optimal use of their working capital without exposing themselves to cash flow risks, which can help them decide whether to invest in growth or hold off on spending to build up a cash reserve.
Establish effective cash flow KPIs
Cash flow key performance indicators (KPIs) help businesses measure and analyze their cash flow situation more effectively. Adopting a sophisticated approach to cash flow measurement and committing to carrying out analysis against pre-set KPIs regularly allows businesses to track improvements and adjust strategies accordingly.
Deciding which KPIs to focus on depends on the business’s specific cash flow objectives, such as funding growth, limiting debt, or increasing resilience to external factors.
FAQs
Flexible Funding 2.0 is designed to help you meet your short-term cash objectives. Use Flexible Funding when you need to:
• Make DPO or CCE improvements for financial reporting
• Free up cash for an unplanned initiative (not forecasted)
• Avoid running short on cash payment accounts (due to early payment demand)
• Leverage a low-risk investment option for idle cash
• Maneuver as market conditions shift
• Improve supplier relationships with access to reliable cash flow
Generally speaking, no. Flexible Funding offers a blended experience of Taulia’s Supply Chain Finance and Dynamic Discounting solutions. Whereas Supply Chain Finance permits one early payment offer per day, Dynamic Discounting presents multiple offers on a sliding scale the user can review on a digital calendar. Selecting fixed or variable-rate financing with Dynamic Discounting will influence whether suppliers receive one or multiple offers per day in certain situations when Flexible Funding is activated. Consistent pricing between funding sources — structured in advance through collaboration by all parties — also ensures a unified experience for suppliers.
Rate parity concerns the consistent cost of supplier financing between funding sources. Traditionally, companies have sought to maximize their yield on dynamic discounting while insisting banks keep their margins thin on accelerated payments for suppliers. This rate disparity incentivizes suppliers to “shop” for the best price when both funding sources co-exist in a Flexible Funding-enabled program. A better approach is fair and consistent pricing between funding sources so that suppliers feel like they get a good deal on needed liquidity and buyers optimize the return on their investment with high supplier participation.
Cash flow measures money entering and leaving a business. Learn everything you need to know about this important metric in our glossary post.
Read our full guide to sustainability in supply chain management, covering what a sustainable supply chain actually means and how it can benefit a business.
Accounts receivable automation (or AR automation) is the practice of automating parts of the accounts receivable process in a business. Learn more here.
Flexible Funding is a feature for Taulia Payables that allows buyer organizations to use the right funding at the right time. It gives corporate treasurers options to meet their short-term cash flow needs without restricting the liquidity suppliers rely on.
A working capital funding gap is the difference between short term assets and short-term liabilities. Learn everything you need to know about funding gaps here.
Working capital funding, also known as working capital financing, is a method of business financing. Learn more about the types of working capital funding here.
Integrated ERP systems refers to the combination of an ERP with integrated modules that can help you manage diverse business processes from one platform.
Learn everything you need to know about supplier segmentation, including what supplier segmentation model to use and how to tackle the process, in our guide.
What is ESG? ESG stands for environmental, social and governance. Together, these three principles form a framework that’s used to measure how sustainably, ethically, and responsibly an organization is acting. ESG is most often used to describe the efforts companies take to mitigate the potential negative outcomes of their operations. It also refers to a…
What is supply chain management? Supply chain management (SCM) describes the process businesses use to manage the flow of goods, data, and payments throughout a supply chain. Effective supply chain management is instrumental in ensuring every element of the supply chain works towards achieving broader business objectives, whether that’s cost-efficiency, resilience, quick order fulfillment, or…
What is supply chain optimization? Supply chain optimization is the process of refining the structure and operation of a supply chain. It aims to make the best use of resources and technology to extract greater efficiency and performance from the supply chain network. Well-optimized supply chains enable businesses to meet their broader objectives, whether that’s…
What is accounts receivable? Accounts receivable (AR) is the term used to describe money owed to a business by its customers for purchases made on credit. It’s listed as a current asset on the balance sheet, representing the total value of outstanding invoices for products or services sold but not yet paid for. Total accounts…
What is cash flow management? Cash flow management is the process of optimizing the flow of money in and out of a business to achieve a specific operational aim. Effective cash flow management enables businesses to use their working capital better and fuel growth or build resilience. It involves using several levers, including the approach…
What is strategic sourcing? Strategic sourcing is the term used to describe a strategic approach to the sourcing process. It involves the same fundamental steps – research, analysis, negotiation, contracting, and onboarding of new suppliers to fulfill demand for goods or services – but is oriented to contribute to broader business objectives. It also often…
What is automated spend analysis? Automated spend analysis is an automatic digital process that captures, consolidates, and interprets spend data across an organization. It’s used to provide insights into spend efficiency and effectiveness, informing sourcing and purchasing decisions. It’s typically facilitated through dedicated automated spend analysis software, usually integrated with a wider enterprise resource planning…
What is the new FASB accounting treatment for supply chain finance? In September 2022, the Financial Accounting Standards Board (FASB) — the governing body for accounting standards in the United States — updated its standards to include a requirement for SCF disclosure on company financial statements. For most organizations, disclosure of an existing SCF program…
What is spend visibility? Spend visibility refers to how well a company can understand and track how, where, and why capital is used in their business operations. Spend visibility increases when finance teams can more accurately see where company money is being spent. Low spend visibility is defined by difficulties tracking spend comprehensively or accurately….
What is 2/10 net 30? 2/10 net 30 is a trade credit often offered by suppliers to buyers. It represents an agreement that the buyer will receive a 2% discount on the net invoice amount if they pay within 10 days. Otherwise, the full invoice amount is due within 30 days. It’s one of the…
What is working capital ratio? Working capital ratio is a measurement that shows a business’s current assets as a proportion of its liabilities. It’s a metric that provides an overview of financial health and liquidity, indicating whether current liabilities can be paid by existing assets. In the case of working capital ratio, assets are typically…
What is a virtual card? A virtual card is a payment method that is virtual rather than physical. It functions similarly to a traditional credit card but takes the form of a single-use 16-digit number and three-digit CVV code generated online, instead of a plastic or metal card that is received through the post. Virtual…
What is e-procurement? E-procurement refers to the set of digital processes that dictate B2B buyer-supplier relationships in the supply chain. Utilizing technology, e-procurement aims to centralize the workflows involved in purchasing goods or services and bring about efficiency improvements. It’s essentially the digitization of the standard procurement process. E-procurement, short for electronic procurement, replaces traditional…
What is source-to-pay? Source-to-pay (or S2P) is the process that outlines how organizations fulfill their sourcing and procurement needs. It begins with the identification of demand for a product or service, encompasses steps including supplier selection, contract management, and requisition, and ends with a payment being made. It can be split into two composite sections:…
What is supplier relationship management? Supplier relationship management is the set of processes that organizations use to build, manage, and maintain relationships with their suppliers, or vendors. A supplier relationship management strategy is essential to ensure that relationships are built productively, with a view to increasing the overall effectiveness and resilience of the supply chain….
What is supplier information management? Supplier information management (SIM) refers to the set of processes or the system that organizations use to collect, store, access, and update important data about their suppliers. From contact details to contractual documentation, the data involved in supplier information management is essential in the broader process of vendor management. A…
What is AP automation? AP automation, short for accounts payable automation, is the use of software to automate part or all of the accounts payable process. It aims to create efficiency in the accounts payable workflow by digitizing how vendor invoices are received, processed, and stored. In removing manual processes and the need for paper-based…
What is accounts payable? Accounts payable (AP) represents the amount that a company owes to its creditors and suppliers (also referred to as a current liability account). Accounts payable is recorded on the balance sheet under current liabilities. When a business purchases goods or services from a supplier on credit, payment isn’t made straight away,…
What is accounts receivable (AR) financing? Accounts receivable or AR financing is a type of financing arrangement which is based on a company receiving financing capital in return for a chosen portion of its accounts receivable. An AR financing arrangement can be structured in several ways, including as an asset sale or a loan. Essentially,…
What is the cash conversion cycle (CCC)? The cash conversion cycle (CCC) – also known as the cash cycle – is a metric expressing how many days it takes a company to convert the cash it spends on inventory back into cash by selling its product. The shorter a company’s CCC, the less time it…
What is cash flow forecasting? Cash flow forecasting, also known as cash forecasting, estimates the expected flow of cash coming in and out of your business, across all areas, over a given period of time. A short-term cash forecast may cover the next 30 days and can be used to identify any funding needs or…
What is Days Inventory Outstanding? (DIO) Days inventory outstanding (DIO) is a working capital management ratio that measures the average number of days that a company holds inventory for before turning it into sales. The lower the figure, the shorter the period that cash is tied up in inventory and the lower the risk that…
What is Days Payable Outstanding? (DPO) Days payable outstanding (DPO) is a useful working capital ratio used in finance departments that measures how many days, on average, it takes a company to pay its suppliers. As such, DPO is an important consideration when it comes to managing a company’s accounts payable – in other words,…
What is Days Sales Outstanding? (DSO) Days sales outstanding (DSO) is a working capital ratio which measures the number of days that a company takes, on average, to collect its accounts receivable. The shorter the DSO, the faster the company collects payment from its customers – and the sooner it is able to make use…
What is dynamic discounting? Dynamic discounting is a solution that provides suppliers with the option of receiving early payment in exchange for a discount on their invoice. As a result, suppliers can typically access lower cost funding than they might otherwise receive, while harnessing working capital in order to invest in growth and innovation. Buyers, meanwhile,…
What is an early payment discount? An early payment discount is a form of trade finance, allowing buyers to pay a discounted amount to suppliers in exchange for settling invoices before their maturity date. Also known as a prompt payment discount or early settlement discount, it’s typically calculated as a percentage of the goods and…
What is inventory management? Inventory management is a systematic approach to sourcing, storing, and selling inventory. Effective inventory management involves optimizing the flow of goods within an organization, from purchase right through to sale, always ensuring that an appropriate quantity is available in the right place and at the right time to meet customer demand. Inventory in…
What is invoice processing? Invoice processing is a business function that involves managing incoming invoices from initial receipt through to payment. It’s carried out by the accounts payable department and is a critical component of the procure-to-pay process as the final step of any procurement activity. The invoice processing cycle is made up of several composite…
What is inventory cycle time? Inventory cycle time is the amount of time it takes to produce and deliver an order from a customer, usually measured in days. It essentially measures the speed at which a company can complete the manufacturing or assembly process from start to end, turning raw materials or components into a…
What is procure-to-pay? (P2P) Procure-to-pay is a term that encompasses the processes which take place when a company purchases, receives and pays for goods and services. The activities that make up the procure-to-pay process range from identifying the initial need for procurement of goods or services to the final steps of approving invoices and paying…
What is the procurement life cycle? The procurement cycle is the process businesses use to find and obtain goods. It involves multiple steps, including identifying the need for a good or service, finding the right supplier, negotiating terms, creating a purchase order, and receiving the delivery. It’s also known as the procurement life cycle or,…
What is receivables finance? Receivables finance, or receivables financing, is a trade finance method businesses can use to receive funding matching the amounts owed to it by its customers in outstanding invoices. These amounts are known as trade receivables or accounts receivable. By financing its receivables, a business can receive payments earlier, meaning it can…
What is reverse factoring? Reverse factoring is a type of supplier finance solution that companies can use to offer early payments to their suppliers based on approved invoices. Suppliers participating in a reverse factoring program can request early payment on invoices from the bank or other finance provider, with the buyer sending payment to the…
What is trade finance? Trade finance is the term used to describe the tools, techniques, and instruments that facilitate trade and protect both buyers and sellers from trade-related risks. The purpose of trade finance is to make it easier for businesses to transact with each other. It also helps to reduce the risks involved in…
What are trade receivables? Trade receivables are defined as the funds owed to a business by its customers following the sale of goods and services on credit. Also known as accounts receivables, it is also classified as current assets on a company’s balance sheet. Most companies extend credit to customers for purchases, making trade receivables…
What is strategic procurement? Strategic procurement, or procurement strategy, is the process businesses use to acquire goods or services of the right quality, at the right price, and in time to meet customer demand. It brings procurement activities in-line with a company’s broader objectives, while also reducing supply chain risk. Strategic procurement is a long-term, organization-wide…
What is supply chain finance? Supply chain finance, also known as supplier finance or reverse factoring, is a financing solution in which suppliers can receive early payment on their invoices. Supply chain finance reduces the risk of supply chain disruption and enables both buyers and suppliers to optimize their working capital. Unlike other receivables finance…
What is vendor management? Vendor management is a term that describes the processes organizations use to manage their suppliers, who are also known as vendors. Vendor management includes activities such as selecting vendors, negotiating contracts, controlling costs, reducing vendor-related risks and ensuring service delivery. The vendors used by a company will vary considerably depending on…
What is working capital management? Working capital management is a business process that helps companies make effective use of their current assets and optimize cash flow. It’s oriented around ensuring short-term financial obligations and expenses can be met, while also contributing towards longer-term business objectives. The goal of working capital management is to maximize operational…
