Table of contents11 sections
A company can report a profit, keep issuing invoices and win new clients, and still have no funds for salaries, taxes or suppliers.
This happens because revenue shown in documents does not always mean the money has already reached the account. Cash flow shows exactly this difference.
A company can report a profit, keep issuing invoices and win new clients, and still have no funds for salaries, taxes or suppliers.
Cash flow: what is it?
Cash flow shows the company’s actual inflows and outflows over a given period.
Put simply, it answers the question:
How much money has actually come into the company and how much has gone out?
The simplest formula is:
Net cash flow = actual inflows – actual outflows
If the company received more money than it spent, cash flow is positive. If it spent more than it received, cash flow is negative.
Why analyse cash flow?
Cash flow analysis lets you check whether the company has enough money for its current payables.
It helps answer questions such as:
- will there be enough funds for salaries,
- will the company pay taxes and contributions on time,
- when will clients’ money arrive,
- what expenses will appear in the coming weeks,
- can late invoices threaten liquidity,
- when might a cash gap occur.
Cash flow is especially important in service companies, which often finance the delivery of a project first and only get paid later.
Before the client’s money arrives, the company may already have incurred the costs of:
- employees,
- B2B contractors,
- subcontractors,
- software,
- advertising,
- production,
- taxes and contributions.
Why does profit not mean money in the account?
Profit and cash flow show two different areas of a company’s finances.
Profit is the difference between revenue and the costs assigned to a given period.
Cash flow is the difference between the money that actually came in and the money that was actually spent.
A company can issue an invoice and report revenue even though the client will only pay in 30, 60 or 90 days. Meanwhile, salaries, taxes and subcontractor invoices have to be paid earlier.
Example:
- the company issued invoices worth 100,000 PLN,
- it incurred costs of 70,000 PLN,
- it reported a profit of 30,000 PLN.
But in the same month:
- clients paid only 40,000 PLN,
- 65,000 PLN left the company’s account.
So cash flow is:
40,000 PLN – 65,000 PLN = –25,000 PLN
The company reported a profit, but its cash fell by 25,000 PLN.
What you need to know about cash flow
Revenue is not an inflow
Issuing an invoice does not mean the money is already in the account. Until the client pays, the company has a receivable, not cash.
A cost is not always an outflow
A cost may be assigned to a different period than the actual payment. A company may also know about a future expense even though it has not yet received the invoice.
The account balance does not show the whole picture
A high balance can give a false sense of security. Part of the funds may be needed for VAT, taxes, salaries or invoices that fall due in a few days.
Positive cash flow does not always come from sales
The account balance can rise thanks to a loan, a shareholder’s loan or the sale of assets. That is why you should check not only the value of inflows but also their source.
A profitable project can cause a cash gap
A project can bring a profit but require you to finance the work of the team and subcontractors before receiving payment from the client.
How to calculate cash flow?
The simplest analysis involves three steps.
Step 1. Add up the actual inflows
Include the money that actually appeared in the account:
- client payments,
- advance payments,
- subscription payments,
- other inflows.
Do not include invoices that have been issued but are still unpaid.
Step 2. Add up the actual outflows
Include, among others:
- salaries,
- subcontractor invoices,
- taxes and contributions,
- software,
- rent,
- leasing,
- loan instalments,
- other payables that have been paid.
Step 3. Subtract outflows from inflows
Example:
- inflows: 120,000 PLN,
- outflows: 95,000 PLN.
Net cash flow = 120,000 PLN – 95,000 PLN = 25,000 PLN
This means that over the analysed period the company’s cash increased by 25,000 PLN.
What does cash flow tell you?
Cash flow shows whether the company:
- generates cash from its core business,
- has funds for current payables,
- depends on loans or borrowings,
- finances its clients with its own money,
- can safely take on further projects,
- is prepared for payment delays,
- is approaching a period of cash shortage.
Historical cash flow shows what has already happened in the company. To make decisions, however, you also need a forecast.
What is a cash flow forecast?
A cash flow forecast shows how the amount of money may change over the coming weeks or months.
It should take into account:
- the current balance,
- issued and unpaid invoices,
- expected inflow dates,
- planned invoices,
- salaries,
- taxes,
- fixed costs,
- project costs,
- future payables.
The formal payment due date on an invoice does not always match the actual date of the inflow. If a client regularly pays 14 days late, a good forecast should reflect their real behaviour.
This way the company can notice earlier that it will run short of funds in a few weeks, and react accordingly.
How does Administy help control cash flow?
Administy provides a full analysis of cash flows, both historical and forecast. You see where the money comes from and where it goes.
The system combines data from:
- sales invoices,
- cost invoices,
- bank transactions,
- receivables,
- payables,
- planned costs,
- clients’ payment history.
Administy shows the financial result and cash flow side by side, so you can see the difference between:
- a sale,
- an issued invoice,
- a receivable,
- a payment received,
- a cost,
- an actual outflow.
One forecast instead of many spreadsheets
Data does not have to be combined by hand from the invoicing program, online banking, the project system and spreadsheets.
Administy gathers the information in one place and shows a single forecast of future inflows, costs and balance.
Early warning of cash gaps
The system lets you see earlier the periods in which planned expenses may exceed expected inflows.
This way the company can:
- speed up invoicing,
- ask the client for an advance payment,
- split the payment into stages,
- contact the client before the due date,
- postpone selected expenses,
- plan additional financing earlier.
Summary
Cash flow shows the real movement of money in the company. It answers not how much the company sold, but how much money it actually received and spent.
A company can report a profit and still lack funds for current payables if clients have not yet paid and the costs have already been incurred.
That is why it is worth regularly checking:
- actual inflows,
- actual outflows,
- unpaid receivables,
- future payables,
- the forecast balance,
- possible cash gaps.
Administy combines historical financial data with a forecast of future cash flows. Instead of many spreadsheets, the company gets one up-to-date view of cash flow, earlier warnings of cash shortages and the ability to check “what if” scenarios.
Important information
This article is for information and education only. It does not constitute accounting, tax or financial advice.
