Cash flow

Cash flow is perhaps the most important parameter in self-employment and entrepreneurship - and famous entrepreneurs once said "Cash flow is more important than your mother" - we'll let you decide if that's true - but let's be clear that you often won't survive long as a self-employed person if your cash flow isn't there - or if you don't have it under control.

In this article, we focus on the word cash flow, why cash flow is important - and how to best manage it.

In Denmark, the word "pengestrømme" is also used for the word Cashflow - and covers one and the same thing. Words like liquidity are also used around the topic.

What is cash flow?

A cash flow is a company's cash flow of incoming and outgoing payments for a given period; a month, a quarter or for the whole year.

Naturally, most companies want a positive cash flow - in other words, more income than expenses. The company can easily have more expenses than income for shorter periods of time - it just requires that the company has the cash to do so - or that within a period of time more income will be added.

Incoming payment flows

Businesses can have many different cash flows, including revenue from sales of goods and services, interest, return on investments and the like.

Many businesses have a fairly steady stream of revenue throughout the year - while there are also a large number of businesses whose primary revenue is only for a few months of the year, for example.

If your business has highly seasonal sales, this means that you need to make sure you have cash for expenses that are also outside of the sales period.

Outgoing payment flows

The company's outgoing cash flows cover expenses such as rent, salaries, purchases, interest, installments, etc.

Similar to incoming cash flows, the company typically has its outgoing cash flows spread out over the entire accounting period, including rent, salaries, etc. while unforeseen expenses can occur at any time.

Predicting your cash flow is difficult - but important

Working with cash flow is certainly not easy - and the more complex a business is, the harder it often is to work with cash flow.

Because it's not enough to just know your existing cash flow - it's just as essential to be able to work with your future cash flow.

Forecasting your company's income and expenses is a discipline in itself - but try it anyway. By forecasting your company's expected income and expenses, you can get a much better idea of your company's direction, growth - and not least the opportunity to invest and expand.

For example, look at your previous reports - is there a clear trend of when x, y and z companies buy, how much they buy, etc. That way you can start working on when they might next buy from you - and for how much.

The same procedure should apply to your expenses - you usually have them under control if they are booked and accrued correctly in your accounts.

What do I need the cash flow for?

If you have more income than expenses throughout the year, it's obviously good for you - and your business. You have a positive cash flow and a healthy business.

But very few companies don't have more expenses than income for larger or smaller periods - which basically doesn't matter if the entire accounting period is positive and/or you can afford to finance the periods with a deficit.

But during periods when income does not exceed expenses, it can be good to have a detailed cash flow statement. For example, if you know that 1-2 or 3 months of the year have more expenses than income - you may need to draw on liquidity - or even need an overdraft or other financing.

A bank or other lender will often ask for a cash flow statement so you can show that for the rest of the year the business actually has more income than expenses and that the period you want credit for is only temporary.