Cash Flow (CF): The Definition and Example
Why do you need to learn cash flow?
Well, cash flow (CF) can show you how money comes into your business and how you are using it. The best point about CF is not only you can make decisions to make your business more profitable, but also you can talk about every business in the financial language so that everybody in the business market can understand your business. Cash flow is actually one of the best ways to talk to a potential investor for your business.
What is cash flow?
Let’s get right into it, as I said before CF is the money stream in your business. It can show you how money flows in your business in a specific time frame. Let me first tell you the way to heart yours and then show you an example so you can see how to create cash flow for your own business.
How to create cash flow?
First of all, you have to choose a time frame. In which time frame do you want to track the money stream in your business? Don’t worry, you will understand it all, just keep reading. Let’s continue with the monthly cash flow.
In this step, you have to write down everything that you spend money in a month. For example, if your business has 10 employees and each of them costs you 1,000$ per month and you have NO other costs, then you have 10,000$ costs per month. Now let’s say you buy an office for 100,000$ in the second month. If you write them all, you should have something like the table below:
Just like the costs, write down everything that you are earning money with and also write the amount of money you earn from it each month. Let’s say your business is selling a product for 20,000$ from the second month and you are also got 100,000$ investment in the fourth month. You should have some table like the table below for your earnings:
Finally The Cash Flow
Now that you have done all this, all you have to do is to merge those tables. You just have to calculate earnings minus costs. Let me show you how:
How to Use Cash Flow
You can use cash flow to have an overall view of your business and also use it to tell other people about your business like investors as needed. It can also be used for deciding whether to start a business or not because with CF you can see how much money you will need to run a business or even a new project in an existing business.
Take Home Message
Cash flow is a tool to have a good look in a business or project. You can see it abstractly by making the time frame bigger or have a closer look by shrinking the time frame. It is useful in two situations. First to decide whether to start a business and see if you can afford it in short, middle, or long term. Second, sooner or later you will need to convince an investor to help you with your business. They want financial information from you and cash flow can help you a lot in that situation.