Meaning of Cash Inflows and Cash Outflows
Cash inflow refers to the amount of money coming into a business. This money that goes into a business may come from sales, investments, or financing.
On the other hand, cash outflow is the opposite of cash inflow. Cash outflow refers to the amount of money leaving the business.
Learning how to calculate and analyze the two SaaS financial metrics will enable you to make better-informed strategic decisions. It will also help you to maximize the use of your limited resources.
Difference Between Cash Inflow and Cash Outflow
One distinct difference between the two cash flows is that cash inflow is the money entering a business, while cash outflow is the money going out.
Furthermore, in cash inflow, the money entering a business may come from sales, investments, or financing. In other words, examples of cash inflow include money earned from the sale of goods and returns on any investments. On the other hand, your cash outflow consists of operating expenses, debts, and other liabilities.
The Importance of Cash Inflow and Cash Outflow
Both cash inflow and cash outflow represent the primary financial position of your business. Every business depends on cash to survive. It is unlikely for any business to survive without money. Thus, optimizing the daily operations of a business requires a thorough understanding of its cash inflows and outflows.
Positive and Negative Cash Flow
As a business owner, you need to know that your inflows will eventually exceed your outflows if you want to create a long-term profitable business. A business where cash inflows exceed cash outflows will have a positive cash flow. In other words, positive cash flow is when more money coming into your company is more than the cash going out.
On the other hand, a negative cash flow is when the cash outflow is more than the cash inflow. In other words, if your cash flow is negative, it implies the money going out of the business is more than the incoming money.
What Does Positive and Negative Cash Flow Tell You About Your Business?
A positive cash flow is a good sign that you have enough money to pay shareholders and invest in the growth of your business without taking on too much debt. It is essential for mature startup companies that use Venture Capital (VC) to fund their businesses and public companies that must show their ability to run efficiently while expanding.
On the other hand, negative cash flow indicates that you are spending more money than you are bringing in. It often occurs in growth-at-all-costs startups. Because of this, a broad overview of both cash inflows and outflows is insufficient.
Thus, to continuously increase efficiency and create more strategic growth plans, you need an in-depth knowledge of the breakdown of cash inflows and outflows.
Different Categories of Cash Flows
Three activities contribute to business cash flow, each of which has associated inflows and outflows. These three activities include operating, investing, and financing.
1. Cash Flow From Operating Activities
Cash flow from operating activities refers to the money coming in or going out of your business due to your regular business activities. These include activities like the production and sale of your goods and services.
Cash inflow from operating activities includes the net income you make from selling goods or products and services, inventory, and accounts receivable.
On the other hand, cash outflow from operating activities includes your business-associated ongoing expenses. These include rent, sales and marketing expenses, income taxes, and employee salaries.
2. Cash Flow From Investing Activities
Cash flow from investing activities consists of the movement of money related to the investments made by your company. These investments can be long-term investments such as purchasing new machinery or buildings. It can also be a short-term investment, like the purchase of marketable securities.
Cash outflow from investing activities includes the purchase of any investment. In other words, a certain amount of money goes out of your company in exchange for the investment. On the other hand, selling a long-term asset, like a piece of machinery, generates cash inflow.
In the Investing category, it is common to see more outflow than inflow in many businesses. The reason is that growing companies are more likely to invest in long-term assets that support business growth.
3. Cash Flow From Financing Activities
Cash flow from financing activities includes debt payments, stock sales, dividends, loans, and funding rounds. Cash inflow in this financing category consists of the amount of money you borrow and earnings from the sale of stock or equity.
On the other hand, cash outflow in the financial category includes dividend payments and money spent on paying off the principal amount on existing debts. Note that cash outflow for interest payments does not count as a financial activity. Instead, it is in records as an operating activity.
Cash Flow Reporting and its Calculation
The standard cash flow statement or statement of cash flows is the most fundamental type of cash flow reporting. Three sections, each section for one activity (operating, investing, and financing), make up a cash flow statement. In each section, you enter cash inflows as positive values (credits) and cash outflows as negative values (debits).
Then, you have the net cash flow for each activity and your entire business. The cash flow statement also includes cash expenses and receipts and changes in the value of current assets (like depreciation), credit or debit purchases, and dividends.
Aside from using the standard cash flow statement, financial analytics software is another option for visualizing your cash inflow and outflow over time. You can also view a graph of the money entering and leaving your business.
With Mosaic, you can see a line representing your net cash flow over a specific period. You can view this in Mosaic by opening the Cash Inflows and Outflows report.
Graph of cash inflows and outflows
Using financial analytics software to perform financial analysis enables you to create rolling forecasts (financial planning tool which helps businesses to forecast their future performance over time). It can also help you to adopt a quick strategy to manage your money since it gives you access to real-time data.
A monthly and quarterly review of cash flow statements may be sufficient for more established businesses. However, high-growth companies that focus on maximizing runway and stretching venture capital (VC) funds as far as they can analyze their cash flow more often.
It may be possible for more established corporations to create a cash flow statement once a quarter. But startups with short runways and higher stakes may not do so.
Different Factors Affecting Cash Flow
Since every aspect of business involves cash, this means that many factors could have an impact on your cash flow. The following are some of the business functions that directly affect cash flow:
1. Account Receivable (AR)
Account Receivable is the amount owed to a business for goods or services delivered or used but for which customers have not yet made payment. Too many unpaid receivables can slow down the money coming into your company, which affects cash flow.
2. Accounts Payable (AP)
Accounts Payable are unpaid short-term debts businesses owe their suppliers or creditors. Paying suppliers or creditors on time helps create smooth cash flow.
However, having poor Account Payable (AP) management can result in a buildup of late fees and strained relationships with vendors. Consequently, this makes it more challenging to bargain for better purchasing conditions.
3. Headcount
The total number of employees in a business also affects its cash flow. For any Software as a Service (SaaS) company, payroll represents their highest expense. As a business owner, you anticipate payroll surpassing all other cash outflows you manage as your business grows.
4. Cost of Revenue
Reaching significant revenue targets requires an increase in sales and marketing expenses. In the short term, the amount of money you spend on advertisements will affect your cash flow. In addition, you should include longer-term projections of how those advertisements will generate income in your cash flow analysis.
5. SaaS Pricing and Cost of Revenue
Although Software as a Service (SaaS) pricing strategy is not a perfect science, you should aim to maximize cash flow when setting your prices for your goods and services. The reason is that you might not be bringing in enough money (sufficient cash inflow) to support growth if your prices are too low.
How to Improve Cash Flow
Improving cash flow can mean increasing positive cash flow or turning negative cash flow into positive cash flow. However, to achieve this, you must either increase cash inflows, cut cash outflows, or do both. Below are some of the best strategic finance tips you can employ to increase the cash flow of your business and free up resources for growth:
1. Lease Rather than Purchasing
Purchasing machinery and property may be less expensive in the long run. But it needs more capital upfront. Even if you decide to finance your purchase, many banks and lenders demand 20 percent to 30 percent down payments.
For more established companies, this might not be a big issue. But small businesses and new startups need to be very strategic with their cash flow in the early stages.
You can get similar property or machinery for a lower initial cost and negotiate terms to reduce your monthly expenses when you lease. Doing this will help reduce your business cash outflow and have more money available to pay for operating expenses. Furthermore, finance departments and modern CEOs should consider cash flow and bottom-line savings when creating budgets.
2. Encourage Early and Prompt Payments
As a business owner, when customers pay late, it can affect your cash flow negatively. Furthermore, suppliers may not extend their payment dates simply because business owners are waiting for accounts receivable.
As a result, businesses may be unable to pay their suppliers on time which can strain their relationship with their suppliers. Therefore, there is a need for business owners to encourage their customers to make early and timely payments.
You can achieve this by changing your payment terms if your clients often pay late. You can consider offering discounts for early payments or creating clauses in your contracts that penalize late payments.
3. Improve Processes For Accounts Receivable (AR)
While changing your payment terms, review your billing procedures and see if there are any payment barriers you can remove on your end. In particular, ensure you send out invoices on time and give your clients enough time to review and pay them.
Furthermore, accepting online payment forms like credit, debit, and ACH deposits can also help you reduce the late fees that come with mailing checks. Setting up recurring payments can help SaaS businesses. It will help save them time on customer follow-up and payment reminders.
4. Tailor Your Cash Flow Forecasts
By utilizing your current cash flow, cash flow forecasting can assist you in forecasting future bank balances. When managing startup finances, you need a different approach to cash flow forecasting.
For instance, you must pay attention to both short- and long-term cash flow. Short-term cash flow reports will enable you to view your real-time limited runway management. You can easily access this information on your financial dashboard.
Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) should monitor their cash flow trends. Doing this will enable them to enhance financial management and help them make the best use of their limited resources. It transforms cash flow into a strategic tool for future use rather than merely a financial analysis element after the fact.
5. Paying Suppliers Electronically
Practicing same-day transactions will improve your cash flow, particularly in the accounts payable department. Knowing that debit deduction from your account will happen the same day you make a payment is preferable to waiting for your vendor to cash a check following the mail delivery.
Furthermore, use debit and credit payments to your advantage when paying for expenses to increase your overall financial efficiency. As a bonus, your credit card company may allow you to benefit from early payment discounts, lower late fees, and even earn cashback rewards. Additionally, you can renegotiate better terms with your vendors when you have a reputation as a client who consistently makes payments on time.
6.Modify your Pricing Strategy
Sometimes, you may not generate a positive cash flow despite your best efforts to cut costs. You may also lack the funds necessary to make growth investments.
When this is the case, it might be time to review your pricing strategy again. Reviewing your pricing strategy again could entail increasing prices or adding a fee for features and services you have been offering for free.
According to CB Insights, 15 percent of startups fail due to pricing or cost issues. It may not seem like much until you realize that poor pricing kills more startups than sub-standard products, bad teams, and wrong timing.
It may be enticing to continue with freemium business models to aid customer acquisition. However, you must feel at ease raising prices or charging in line with the value you offer if you want your business to grow.
Visibility Is the Key to Improving Cash Inflow and Outflow
It can be hard to run a business without reviewing your finances as the company owner. For startups, small businesses, and enterprises alike, having CEOs and CFOs, who are knowledgeable about business cash flow is essential.
Finding out how money comes into and leaves your company can mean the difference between securing additional funding and giving up. You can get a personalized demo to learn more about financial intelligence dashboards that reduce data aggregation times, and deliver quicker, insightful data.