Last editedOct 20212 min read
While physical cash might be very much on the wane as we slowly find ourselves becoming a cashless society, certain terms will undoubtedly remain tied to good old-fashioned paper money because, as the old saying goes, “cash is king”. Cash inflow is one such term and it’s one we’ll be discussing in-depth below.
What are cash inflows?
Cash inflow quite literally refers to any money going into a business. This could be from financing, sales and investments or even refunds and bank interest. Perhaps the most obvious way of measuring a business’ health is how its cash inflow compares to its cash outflow (all money leaving the business). If the former is higher than the latter then the business is generally perceived as being in good health. Of course, this isn’t always the case as there are dozens of other factors to consider but it’s always a good place to start.
The importance of cash inflows
A business stands and falls not only on its employees but on its finances. Without cash inflow, a business would be unable to cover its operating costs, pay its bills and pay its staff a living wage. Invoices might be paid late and business contracts might not end up generating any significant returns for months or even years but cash is a tangible thing that can be spent, invested or saved.
That’s why cash inflow is still valued as such an important metric even though it might seem rather basic on the surface. It’s a metric that many investors focus on when deciding whether or not to invest in a business. They will examine a cash flow statement (CFS) to analyse the liquid assets coming into and leaving the business and use that data to help them map out long-term trends and get a clearer picture of where the business is at.
It’s also one of the more difficult things to manage, often due either to delayed payments from customers/clients or the time it takes to agree to funding.
Examples of cash inflows
There are four types of cash inflows and outflows:
Operating activities – this refers to the cash generated by your business and doesn’t include any of the funds derived from investments.
FCFE – free cash flow to equity refers to the cash available after it’s been reinvested back into the business.
FCFF – free cash flow to the firm is a measure often used in valuation and assumes the business has no debt.
Net change – this refers to the cash flow from one period of accounting to the next.
The difference between cash flow and income
The cash flow is the lifeblood of any company but it’s a drastically different metric than income in many ways. For one thing, it’s significantly simpler. Incomes and profits are based on the final amounts after all expenses have been subtracted from the total revenue, whereas cash inflows and outflows simply represent the total sum of the money entering and leaving the business.
This is useful for several reasons. Most accountants, for example, record revenue not when it’s received but when it’s earned. This means that the income might increase immediately but the cash flow is going to be delayed until payment arrives. Given that a business might often sell a product on terms that dictate a delay of 30 days or payment in instalments, it’s important to separate the cash flow from the income as they will tell potential investors very different things about your business.
We can help
If you’re interested in finding out more about cash inflows, or any other aspect of your business finances, then get in touch with our financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.