Maintaining a positive cash flow is crucial to the success of your business. But what exactly is cash flow and how can you ensure yours is healthy? Here’s a primer on cash flow: what it is, how it works, and how you can use it to better your financial standing.

Written by Ted James @ tedknowsmoney.com

What is cash flow?

Cash flow is the migration of funds in and out of a business. Tracked either weekly, monthly, or quarterly, there are two main types of cash flow:

Positive cash flow

Positive cash flow occurs when the cash flowing into your business is more than the amount flowing out of it. It essentially means that your income from sales etc. is higher than your expenses such as accounts payable, employee salaries, etc.

Negative cash flow

Negative cash flow is the opposite of positive cash flow. It means the business’s outflow of cash is greater than the incoming amount.

Income vs. cash flow

Profit and loss may seem the same as cash flow but there are specific differences. In a nutshell, income and profit are based on accrual accounting principles. This means expenditures are smoothed out and revenues are matched to the timing of when products or services were delivered. Due to the matching principle and revenue recognition policies, a business’s net earnings can be vastly different from its cash flow.

Tips for maintaining a positive cash flow

Calculating your cash flow is one of the best ways to snapshot the health of your company. Regularly earning more than you spend? Excellent. Cash flow trending more negatively? You have problems. Here are just a few ways you can help maintain a positive cash flow:

Find ways to save

Reducing expenses is a tried and true way to keep your business in the black. Meet with different teams to discuss where you can cut costs. This could be reducing your use of paper and postage by switching to online invoicing. You can also find a less expensive POS system, reconsider your office space and even tap into technology to help lower costs for areas like marketing, payroll and more.

Research grants

If you need to raise funding, look for available grants in your industry. There are many grants available for Canadian companies, but know that there's a lot of competition. Improve your chances by writing a stellar grant application that includes your financials and marketing and branding strategies and research.

Use accounting software

Accounting software isn’t just a nice-to-have. With it, you’ll save time and money by automating everyday tasks and ensuring your finances are clear and up to date.

Build a cash reserve

Building a cash reserve is one of the best ways to protect your cash flow. It will allow your business to weather financial storms and allow you to take advantage of opportunities that arise.

Keep your books up to date

Accurate, reliable bookkeeping is essential for maintaining a positive cash flow. Without accurate data, any cash flow calculations are going to be incorrect. This can easily spell trouble for your company.

Invoicing effectively

Positive cash flow relies on healthy invoicing. You should maintain a set, regular invoicing schedule and ensure any late payments are chased up accordingly.

Keeping your personal and business finances separate

One of the best ways to maintain a positive cash flow is to keep your personal and business finances separate. This allows you to properly calculate the health of your business without worrying about muddying the waters with personal data. Incorporating will make this step easier. It ensures your business and personal dealings are kept separate. It also protects your personal assets from litigation in the event your business runs into trouble.

Nail your cash flow

Maintaining a positive cash flow is one of the best ways to ensure the success of your company. Now you know a little more about cash flow: what it is, how it works, and what you can do to maintain a positive cash flow.

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