What are different ways to measure cash flow ? Guide to Unlocking Sustainable Growth for Your UK Small Business

What are different ways to measure cash flow ? Guide to Unlocking Sustainable Growth for Your UK Small Business

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The Hidden Truth About Your Business

Cash flow measures reveal the hidden truth about your business’s financial health – a truth your profit and loss statement may be concealing.

Have you ever been profitable but struggled to pay the bills?

Understanding cash flow measures reveals the answers, empowering UK business owners to make the smartest moves for growth and avoid hidden pitfalls.

Think of your cash flow like a seasoned athlete analyzes their

performance. It’s not just about raw strength (profit), but the intricate

interplay of resources, timing, and reserves that determine true power and


Ready to uncover the hidden health of your UK small business?

Let’s dive into the essential questions you need answered to master your cash

flow and unlock sustainable growth.

Section 1: Why Do Cash Flow Measures Matter More Than Just Profit?

What’s the fundamental difference between profit and cash flow?

Imagine profit as the score on a scoreboard – it tells you if you’re winning at the end of the game. Cash flow, on the other hand, is like the oxygen keeping your team running on the field. You might be ahead on points, but if your players run out of oxygen, winning becomes impossible.

How can a company be profitable on paper but still struggle to pay its bills?

Think of a landscaping business that just landed a huge contract. They’ll recognize the revenue (and profit) from that project over time. But they need cash now to buy equipment, hire workers, and cover all the upfront costs. If cash flow is tight, they might find themselves unable to fulfill the contract despite turning a profit on paper.

Why do savvy business owners look at specific cash flow measures for a more complete picture?

Profit is essential, but it’s a snapshot in time. Cash flow measures, like operating cash flow, track the movement of money in and out of your business. It’s like having a heart rate monitor for your finances: it reveals not just your health at that moment, but your ability to sustain activity, spot potential problems early, and make informed decisions.

Mini-Case Study

Sarah runs a successful bakery. Her profit margins look healthy, but she often finds herself scrambling to pay suppliers before her customers pay their invoices. Tracking her cash flow measures revealed a pattern: her payment terms were causing a strain, despite her business being profitable overall. This put her at risk of damaging the relationships she had built with her key suppliers.

Section 2: Which Cash Flow Measures Should I Be Tracking?

Think of cash flow measures as different vital signs for your business. Just like blood pressure and cholesterol levels offer insights into

your physical health, specific cash flow measures reveal different aspects of your business’s financial well-being. Here are a few essential ones to understand:

Operating Cash Flow:

This is like the pulse of your business. It measures the cash generated by your day-to-day operations. A strong operating

cash flow indicates you’re bringing in more money than you’re spending on core activities.

Free Cash Flow:

Consider this your financial flexibility. It’s the cash left over after you’ve paid for operating expenses and essential investments.

Healthy free cash flow means you have room to seize opportunities, pay down debt, or even reward yourself as the owner.

Cash Conversion Cycle

This measures how efficiently you turn resources into cash. Think of it like your business’s metabolism – a faster conversion cycle means you collect payments quickly and manage inventory well.

Small Case Study

Mark owns a growing construction business. He was focused on increasing sales but found himself constantly stressed about tight cash flow.

Analyzing his operating cash flow revealed a significant delay in customer payments. By adjusting his invoicing terms, he improved his cash flow and gained peace of mind.

Tracking Tools

Don’t let tracking cash flow feel overwhelming. Start with a simple spreadsheet to track key income and expense categories. As your business

grows, there are affordable accounting software solutions to streamline the process.

Section 3: How Do I Know If My Cash Flow Is “Good” or “Bad”?

Figuring out “healthy” cash flow is vital for assessing your business’s financial well-being. Since cash flow needs vary by industry, focus on finding benchmarks relevant to your specific UK business sector. Where to find industry data: Look for resources like trade association websites, financial data providers, or online forums where similar businesses discuss financial metrics.

Cash Flow Health Quiz: Get a quick snapshot of your cash flow situation

Our short quiz analyzes key measures, giving you an initial gauge of your financial standing. 

Take the Quiz

Curious to find out how healthy your cash flow is? Take this quiz. In less than 60 secs, it will show your situation and the steps you can take to improve.

Analyze your trends:

While benchmarks are helpful, tracking your own cash flow over time is even more insightful. Monitor indicators like cash

reserves and cash conversion cycle to spot positive progress or potential red flags.

Case Study

Jenny owned a web design agency that was growing quickly. Yet, she felt constantly cash-strapped. By comparing her cash flow metrics to

industry benchmarks and tracking her own trends over time, she pinpointed the issue: her generous payment terms for clients were delaying incoming cash. After adjusting her invoicing practices, she noticed a significant improvement in her cash flow, allowing her to invest in her business with more confidence.

Section 4: Can Cash Flow Measures Help Me Spot Cash Flow Problems Early?

Think of your cash flow measures as warning lights on your business’s financial dashboard. Just like a flashing check-engine light in your car signals a potential problem, changes in your cash flow can alert you to issues before they cause a breakdown.

What kinds of changes in cash flow measures should raise a red flag?

  • Declining Operating Cash Flow: If you’re bringing in less cash than you’re spending on core operations, it’s a serious concern, even if you’re still profitable on paper.
  • Lengthening Cash Conversion Cycle: Are you taking longer to collect payment from customers or turning over inventory? This signals a potential cash crunch.
  • Dwindling Cash Reserves: If your cash balance is steadily declining, it means you have less of a buffer for unexpected expenses or seizing opportunities.
  • Increasing Reliance on Credit: If you find yourself increasingly using credit cards or lines of credit to cover basic expenses, it’s a sign that cash flow might be tightening.
  • Difficulty Meeting Payroll Obligations: Any delays or struggles in paying your employees on time is a major red flag indicating a serious cash flow problem.

How can tracking cash flow measures proactively help me avoid major financial issues?

By paying attention to these warning signs, you can take corrective action early on. Perhaps you need to re-evaluate your pricing, tighten up collections, adjust your inventory management strategies, or explore ways to reduce expenses. Identifying issues early gives you the time and flexibility to find solutions before they escalate.

Case Study

Sarah’s bakery was gaining popularity, but she noticed rising expenses eating into her profit margins. Tracking her cash flow measures revealed a problem: the cost of ingredients was increasing faster than she could adjust her prices. Armed with this insight, she renegotiated with suppliers and subtly tweaked her recipes to maintain quality while controlling costs.

Section 5: How Do I Use Cash Flow Insights for Smarter Growth Decisions?

Cash flow measures are like the fuel gauge for your business’s growth engine. You might have ambitious plans (a long-distance road trip), but

if your tank is running low, you won’t reach your destination. Can cash flow measures tell me if I can afford to hire, expand,

or invest? Absolutely! Profit tells you if a venture is worthwhile in the long run, but cash flow reveals whether you have the immediate resources to support it.

How does understanding cash flow give me a clearer picture of what my business can truly handle? Think of it as knowing your strength and

stamina before you sign up for a marathon. Cash flow analysis protects you from overextending and potentially compromising your existing business. It helps you determine a realistic pace of growth that aligns with your financial resources.

Combine cash flow analysis with other data for the most well-rounded decision-making. Definitely! Cash flow is a powerful decision-making tool, but it’s most effective when combined with other insights like market analysis, profit projections, and your overall risk tolerance.

Case Study

Mark was considering opening a second location for his successful coffee shop. The profitability of his first shop made it seem like a

smart move. However, analyzing his cash flow projections revealed that the upfront costs and expected lag in revenue from the new location would put a significant strain on his finances. He decided to scale back his expansion plans, focusing on optimizing his current operations first.

Your Next Steps for Healthy Cash Flow

Understanding cash flow is the key to unlocking sustainable

growth and achieving your goals as a UK small business owner. By now, you’ve

seen how cash flow measures offer insights that even profit and loss statements

can hide. Here’s how to take action:

Start tracking

If you haven’t already, begin tracking core cash flow measures like operating cash flow, free cash flow, and your cash conversion cycle. Even

a simple spreadsheet can make a world of difference.

Find your benchmarks

Research reliable sources for industry-specific cash flow data relevant to your business. This will help you compare your performance to others in your field.

Take the Cash Flow Health Quiz

Get a quick assessment of your current cash flow situation and valuable insights by taking our short quiz. [How Healthy is your cash flow ?]

Ready to take control of your cash flow?

Book a consultation today and unlock your true growth potential.

Remember, strong cash flow management empowers you to navigate challenges, invest confidently in your business, and build the long-term, sustainable success you deserve!

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Shishir Khadka, qualified as a chartered certified accountant in 2009. He is the creator of cashflow hub– the world’s most comprehensive cash flow resource online and is one of the UK’s leading cash flow specialist who helps busy business owners and entrepreneurs generate more profit and create consistent positive cash flow without over relying on getting new sales.

He has delivered a masterclass to a global software Zoho’s audience to create consistent cash flow. He has written articles for floatapp– one of the leading cash flow software and has also been featured in the major publications such as Independent. He has been sharing his learning and insights on his youtube channel.

He wrote about his learnings from helping an e-commerce client scaled the business cash flow positive from £500k to £1.6m in four years in “The Three Key Obstacles to Faster Growth: How You Can Overcome Them Using Cloud Accounting.

In his career spanning 18 years as the cash flow specialist, he has helped businesses of all sizes, ranging from £40K to £40M.

What are different ways to measure cash flow ? Guide to Unlocking Sustainable Growth for Your UK Small Business

By Shishir Khadka, FCCA.