What is cash flow (and why isn’t it the same as profit)?
Cash flow is the money that enters and leaves your business. It shows the cash you currently have in your bank account to pay rent, salaries, supplier bills, and other day-to-day costs.
Profit is the money left after you deduct business expenses from revenue. But profit does not always mean cash is in the bank. You may record sales in your books, but if customers have not paid yet, the money is still not available to pay bills or payroll.
Here is a simple example. A marketing agency completes a $12,000 project in February. The work is finished that month. The agency sends the invoice on March 1 with 60-day payment terms. The client pays in May.
But the business has regular expenses. Employees are paid every two weeks. Office rent is due at the end of the month. These payments must be made before the client’s payment arrives.
In the records, February shows revenue from the project. But the money is not in the bank yet. This is why a business can show profit and still struggle to pay bills. Profit shows what the business earned. Cash flow shows the cash available to spend.
How to calculate your cash flow (using our calculator)?
The calculator takes your total cash coming in, subtracts your total cash going out, and shows you the difference. You need three numbers to get started.
1. Cash inflows
Cash inflows are the payments that have actually reached your bank account. This includes sales revenue, loan amounts, investor funding, and tax refunds. Enter only what you have received, not what you have invoiced.
If you billed a client in October but have not been paid yet, that amount does not count as a November inflow.
2. Cash outflows
Cash outflows are what your business pays out in a given period. Rent, payroll, supplier invoices, loan repayments, software subscriptions, taxes, and insurance all go here.
3. Opening cash balance
Opening cash balance is the amount of money in your bank account at the start of the period you are measuring. This could be the first day of the month or the start of a quarter.
Your closing balance is calculated by adding all cash inflows and subtracting all cash outflows from this starting amount. If the opening balance is incorrect, the final cash position will also be incorrect.
Reading your cash flow: what the numbers mean
The calculator displays four cash position components: cash balance, accounts receivable, accounts payable, and inventory on hand.
1. Cash balance
Cash balance shows the money left in your bank account after all cash coming in and cash going out are counted for the period. A positive balance means more money came in than went out. A negative balance means your spending was higher.
2. Accounts receivable
Accounts receivable is the money customers still need to pay your business. It comes from invoices you have already sent but have not been paid for yet. When customers pay these invoices, the money will come into your business.
3. Accounts payable
Accounts payable is the money your business still needs to pay to suppliers or service providers. These are bills for goods or services you have already received but have not paid for yet. When you pay them, the money leaves your bank account.
4. Inventory balance
Inventory balance shows the value of products your business currently has in stock. These items are ready to sell but have not been sold yet. When the products are sold, they bring money into the business.