When you put together a cash flow forecast, you’ll have a solid prediction of what your business’s cash situation will look like in the coming months. This is crucial for future planning so you can make the right decisions that help your business grow

If you’re thinking about expanding, purchasing additional equipment, or adding more employees, you need to know when it will be safe to do so from a cash perspective. Your cash flow forecast will tell you all of this.

The key to being able to read and use your cash flow forecast is understanding positive and negative cash flow and how they impact your business. Understanding these two concepts and what they mean for your business will make your cash flow forecast an indispensable tool for business management and will help keep your business healthy.

What is positive cash flow?

Positive cash flow is when you have more cash flowing into your business than out of it. This means that your cash spending is less than the amount of cash you received from your customers, new loans or investment in your business, or sales of assets that you owned.

Cash flow is measured over fixed periods of time, typically a month. If you are cash flow positive for several months in a row, your business is accumulating cash and your bank accounts are growing over time. 

What is negative cash flow?

Negative cash flow is when you are spending more cash than you are bringing into your business. When your business has negative cash flow, your bank accounts are being depleted over time and you will have less and less cash over time.

Businesses spend cash on expenses like payroll, marketing, rent, insurance, and other services. They also spend cash to purchase assets like inventory, vehicles, and property. If this cash spending is more than the cash coming in, then the business has negative cash flow.

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How positive cash flow impacts your business

If your business is cash flow positive, it is accumulating cash in its bank accounts. But, does this mean that you should go on a spending spree or give everyone bonuses? Not necessarily.

First, you should make sure that you have a good cash flow forecast to predict your future cash flow. Just because your business is cash flow positive now, does not mean that it will always be in the future. You may have upcoming spending that you need to account for, such as purchasing more inventory or paying off a loan.

If that’s the case, perhaps you should be saving your cash so that in future months, you can easily handle the required cash payments that you need to make.

Your cash flow forecast may also show that you can easily handle future cash obligations and that you will still have additional cash on hand. If you’re so lucky to be in that position, you may want to consider how you can invest in your business for future growth. Maybe it’s time to upgrade equipment or consider an additional location.

If that’s the case, it’s time to create a financial plan that considers those different scenarios to see what makes the most sense for your business.

How negative cash flow impacts your business

When your business is cash flow negative, it means you are spending more cash than you are receiving. While watching your bank accounts get smaller and smaller may be stressful, being in this situation may be perfectly OK.

If your business is very young and you’re just getting up and running, it’s very common to spend more than you bring in. There are a lot of initial expenses with new businesses and it can take time to attract customers and build a viable business. As long as you have a plan and are seeing positive results from your initial customer outreach, spending cash at this stage makes sense.

Another situation that frequently causes negative cash flow is expansion. If your business is growing and you decide to expand into a new location or hire several new employees, you may have negative cash flow until your new location or new employees can start bringing in new revenue.

You could also be choosing to invest in new equipment or other assets that will pay off over time, but purchasing them means that you have negative cash flow for a period of time.

The key to managing negative cash flow, especially during growth and expansion, is to have a solid plan in place. You should have targets for when your business will return to positive cash flow and monitor your progress towards reaching those goals.

If you are looking for tips for turning negative cash flow around, read our article that explains your options for stemming negative cash flow and becoming cash flow positive.

When you have negative cash flow, you should also keep track of your burn rate and runway. Burn rate is the amount of cash that you are “burning” each month. Runway is how long your business can stay alive at your current burn rate. For detailed explanations of these terms, check out our cash burn rate and runway guide.

The key to successful cash flow management 

Positive and negative cash flow are simply two aspects of cash flow, but they’re arguably the most important things to understand as part of a cash flow management strategy. Cash is the lifeblood of business, so you need to ensure that you have a solid strategy and have the tools in place to monitor your current cash situation and predict what your future cash position will look like.

We have a guide for creating a cash flow forecast on your own but recommend that you take a serious look at cash flow forecasting tools like LivePlan to make the whole process easier. After all, your time shouldn’t be spent on cash flow modeling — it should be spent on growing your business and making your customers happy. 

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AvatarNoah Parsons

Noah is the COO at Palo Alto Software, makers of Outpost and the online business plan app LivePlan, and content curator and creator of the Emergent Newsletter. You can follow Noah on Twitter.