What Is The Cash Flow for A Business?
Another term that is frequently used when it comes to business is cash flow. This is also known as cash flow. Cash flow is the difference in money you receive and the money you spend in a certain period of time.
You calculate the cash flow by subtracting outgoing cash flows from the incoming cash flows.
Cash flow, a practical example
At first glance, the cash flow appears to be equal to the profit. That’s not it. Cash flow is about money that actually comes in and leaves your company. An example:
- An independent designer does an assignment for a magazine and sends an invoice. He includes the money in turnover and profit. But the amount is not yet in his account.
When you talk about cash flow, you may not include this amount yet. This also applies to depreciation, which you do not spend at that time. Therefore, they do not belong to the outgoing flow of money in the cash flow.
Read all about setting up a cash flow budget here.
Importance of cash flow
Your cash flow is an important indicator for your company. You can still be so profitable on paper, if you have no more money in hand to pay your bills, it is still all hands on deck.
There are many examples of companies that were profitable and yet went bankrupt, because clients did not pay the invoices, for example.
- Also read: this is how you deal with defaulters .
The difference between gross and net?
Many people still struggle with the difference between gross or net. Still, in most cases it is a simple calculation: net is gross minus taxes.
If you are employed, you know gross and net mainly from your pay slip. The net salary is the amount that is credited to your account. If you deduct the insurance premiums and income tax from the gross salary, you will receive the net salary.
Gross and net for entrepreneurs
It works slightly different for entrepreneurs. As an entrepreneur, when you talk about gross or net, it is usually about the price of a product with sales tax (VAT). The gross price is inclusive of VAT, the net price is exclusive of VAT.