Irrespective of the amount used to start a business, that business will likely fail and close down if a close watch is not kept on its cash flow. And when we talk about cash flow, the focus isn’t all about increasing inflows and cutting down outflows but on developing a strategy that will keep your business afloat at all times. In addition, what happens to the cash flowing into a business as well as how it is being managed will determine whether investors will entrust more funds to your company. So, understanding your cash inflow and outflow, managing it, and keeping an overall healthy cash flow in your business with examples, is what this guide tends to achieve.
Sit tight and enjoy the ride…
What Is Cash Inflow?
The term “cash inflow” refers to all of the revenue generated by your company’s activities, including any profit-generating actions. If you are going to stay in business for a long time, you do not just need a cash flow, you need a healthy one. Why is this? If your business keeps recording cash-out flow without an inflow, you will likely be out of business sooner than you expect. Having a solid cash inflow will keep your business afloat. You will also reinvest and even pay your bills (cash outflow) and build your business. Generally, when we talk about cash inflow, we refer to the money coming into your business.
Sources of Cash Inflow
Business cash inflow can come from any of these means
- Sales – These are cash inflows from the sales of the company’s product. This can be goods or services.
- Investments – These are inflows generated from the business investment into other business
- Financial – These are the cash inflows from investors who invest in the business.
Cash Inflow and Outflow
Cash inflow and outflow are the two types of cash flow. Cash flow refers to the quantity of cash or cash equivalent that a corporation receives or expends as payment to creditors. It provides a picture of the amount of money going into the firm, where it is coming from (cash inflow), and how much is leaving (cash outflow). Your cash flow can be positive or negative depending on the business’s financial activities. The ability of a corporation to generate a positive cash inflow over its outflow determines its potential to create value for shareholders. This is a critical indicator for assessing the health of a company, particularly when broken down into more specific areas like operational expenditures, investments, and debt.
Cash Outflow
A company’s cash outflow is the amount of money it spends. Cash outflow arises from one of the following; investments, financing, and operating activities. A business outflow must not exceed its cash inflow. If this happens, it means the business is recording loss instead of profit.
Cash Flow Affecting Factors
The following are factors that affect a business’s cash flow and as a result its inflow and outflow.
#1. Account Receivable
Accounts receivable is a term that refers to money owed to you. A large number of outstanding receivables might impede cash flow and cause your organization to lose money. Unfortunately, businesses rarely operate without credit However, every business must come up with a means of managing this.
#2. Revenue Costs
The cost of revenue within a firm includes all the expenses that arise from manufacturing to delivering products or services to customers. If this will be under control, then there is a need for your business to increase sales and other cash inflow.
#3. Accounts Receivable
When a business is unable to properly manage its account payable, it may ruin the relationship between you and your customers. And this in the long run affects your business cash inflow and outflow. So in general, making payments to your creditors in time maintains a healthy cash flow.
#4. Wages and Salaries
As your business grows, you’ll need to budget for payroll to far outstrip any other cash outflow. This is one outflow that greatly affects a business. Unless a business has a healthy cash inflow, managing this is difficult. It is one of the reasons why businesses lay off staff.
Cash Inflow VS Cash Outflow
When we talk about the inflows vs outflows of cash, we are basically comparing this two-component of a business cash flow. To present this in simpler terms, we will compare them using a table.
| TERMS | CASH INFLOWS | CASH OUTFLOWS |
| Definition | Generally, cash inflows refer to all the money that comes into a business. | The cash outflow refers to the entire money leaving your business. They are generally expenses incurred by the business within an accounting period. |
| Examples | Examples of cash inflows include the following; investment returns, interest receives on loans, sales, financing, and so on. | Money spent on fixed assets, salaries, payments made to suppliers, loans taken and interest paid on them, wages, transportation costs, and insurance dividends that you must pay are all examples of cash outflow. |
| Effect in an income statement | When there is an increase in cash inflows, it results in a positive number on the statement and this also increases the level of assets a business owns. | When there is an increase in cash outflows, it is a negative figure that indicates the business has made a payout. Examples of a payout include a dividend payment, salaries and wages, repairs, utilities, debt payments, and so on. |
Examples Of Cash Inflow
Customer payments, investment returns, and interest on debts you’ve made to another firm are all examples of cash inflow.
Calculating your Business Net Cash Inflow
To calculate net cash inflow, subtract total fixed and variable costs from the company’s annual revenue.
Practical Cash Inflow Examples
Using the following examples, let’s calculate XYZ’s net cash inflow
XYZ recorded $10,000,000 in revenue from sales, investment, and financing. Its variable costs is $750,000 and its fixed cost is $500,000.
Using the above formula, $10,000,000 – ($2,500,000 + $950,000)
$10,000,000 – $3,450,000 = $6,550,000
The net cash inflow of XYZ for this accounting period is $6,550,000
If Murray’s poultry has $ 1,000,000 in revenue, $450,000 variable and marginal expense, and about $250,000 on its fixed cost, calculate their net cash inflow.
Still using our formula, subtract total fixed and variable costs from the company’s annual revenue.
$1,000,000 – ($450,000 – $250,000)
$1,000,000 – $700,000 = $300,000
Murray’s farm recorded a net inflow of $300,000
Tips for Improving Cash Flow
How can I increase my business cash flow is a question every business owner wants the answer to. Fortunately, this is focused on either reversing a negative cash flow or increasing a positive one. To accomplish this effectively, you must either raise cash inflows or decrease cash withdrawals, or both. The following are some of the proven ways to boost your business’s cash flow.
#1. Pay Vendors In Time
Making payment early is one of the best ways to build relationships with your vendors. Who knows, you may be offered a discount incentive that helps reduce costs. You can also boost your overall financial efficiency with credit and debit payments.
#2. Reward Customers for Early Payments
Well, it is unfortunate but businesses deal with creditors. Some just love delaying payment. Others actually use the money meant for you for other purposes. One of the ways to get customers to pay in time is by using baits such as discounts. Customers’ late payments can put pressure on your financial flow. Everyone loves discounts.
#3. Increase the Efficiency of Your Accounts Receivable Processes
If you do not already have an online payment system, try and incorporate one. Such as credit, debit, and even ACH deposits. They usually help businesses take care of late fees that come with mailing checks. Additionally, setting up regular payments is also very helpful to SaaS companies. It handles the issue of chasing clients and reminding them about payments. Take on any process that will send on an invoice in time, this will give clients enough time to pay up their due. The bottom line is simply to eliminate any long process in terms of receiving payment. That is why the SAP ERP and order management is perfect for online stores and e-commerce. This will help improve your cash inflow.
#4. Rather Than Purchasing, Consider Leasing
Depending on your business’s financial capacity, you can decide to lease rather than buy the property or equipment. Especially if you want to finance your purchase through loans. If your business finance can handle it, then you can go ahead
Other Ways of Improving Cash Flows
- Come up with a better pricing strategies
- Tailor Your Cash Flow Forecasts
What are 3 cash inflows?
The three different categories of cash flows are operating, investment, and financing cash flows.
What is included in cash inflow?
All of the income that your business generates through its operations is referred to as cash inflow. This includes any tactic used to increase profitability. Any debts, liabilities, and operating expenses are all considered a part of the cash outflow of your company.
What is cash outflow?
Any money leaving a business is simply referred to as a cash outflow. Salaries given to staff, upkeep of firm properties, and dividends due to shareholders are all clear examples of cash outflow faced by a variety of enterprises.
What are 3 cash outflows?
Operating, investing, and financing operations are the three different categories of cash flows.
Is credit an inflow or outflow?
Investment outflows involve the acquisition of assets or lending to others. Finance is the third and last group. Examples of finance inflows include business loans or credit lines. Loan repayment, dividend payments, and stock repurchases are a few examples of financing outflows.
Is credit an inflow or outflow?
Investment outflows involve the acquisition of assets or lending to others. Finance is the third and last group. Examples of finance inflows include business loans or credit lines. Loan repayment, dividend payments, and stock repurchases are a few examples of financing outflows.
Is cash inflow the same as revenue?
Additionally, revenue should be seen as a one-way entry of funds into a business, whereas cash flow shows both inflows and outflows of funds. Consequently, unlike sales, cash flow has the potential to be negative.
Conclusion
Every business that is profit-oriented must learn to keep a close watch on its cash inflows. Not just because they want to bring in more money but because, investors’ financing is also seen as an inflow and when your outflow exceeds your inflow, you may be out of business sooner or later as a result of debt. Always remember that a business cash flow statement assists you in tracking your business’s cash flows and determining whether or not modifications are required to better suit your company’s financial growth.
FAQs On Cash Inflow
Why is it crucial to keep track of your cash flow?
Cash flow management entails keeping track of the money that comes into your company and comparing it to how its outflow. It is important because, when this is done appropriately, you will know how to better manage your finance to minimize outflows and increase inflows.
What is the primary objective of cash flow?
Generally, the main purpose of the cash flow statement is to unveil how cash moves in and out of a company within a period.
How can a business increase its cash flow?
The best practice in optimizing cash flow is to go through your business statement. Identify your inflows and outflows, then develop a strategy on how to minimize your outflow and increase your inflows.
