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What is Cash Flow?

The term cash flow refers to the amount of money a company receives in its bank account and how much it has left to pay its bills. 

Cash flow is used to determine a company’s ability to pay its debts and expenses, but it also determines whether or not a company will be able to keep up with its expenses in the future. It is usually described as “flows” because it’s measured in terms of flows, such as income versus expenses, receivables versus payables, and so on.

Positive Cash Flow vs Negative Cash Flow

Positive cash flow is when a company’s liquid assets are increasing, enabling it to cover obligations, pay expenses, return money to shareholders, reinvest in its business, and provide a cushion against future financial challenges.

Negative cash flow is when a business spends more than it makes in income within a given period. 

Free cash flow is a measure of how much money a business has after paying its operating expenses. A business has negative free cash flow when there isn’t any money left over after expenses.

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Cash Flow is different from Profits

It’s important to understand that cash flow is not the same as profits. The term “cash flow” describes the money that comes into and goes out of the company while profit is the amount of money left over after business expenses are subtracted from total revenue.

Profits are made when you sell inventory, collect customer payments, and pay bills like rent or electricity. Cash flow is made when you receive income from customers, such as sales and service fees, but not when you pay employees or make other purchases.

Types of cash flow

There are three types of cash flow: operating cash flow, investing cash flow, and financing cash flow.

Cash Flow from operating activities

  • Net Income
  • Depreciation and Amortization
  • Unrealized gain on marketable securities
  • Decrease/Increase in Deferred Taxes
  • Net decrease/increase in receivables, inventories, prepaid, and payables

Cash Flow from investing activities

  • Purchase of machinery, equipment, and improvements
  • Decrease/Increase in Employee advances
  • Proceeds from the sale of marketable securities
  • Decrease/Increase in Notes receivables
  • Decrease/Increase in Deposits

Cash Flow from financing activities

  • New short-term borrowings
  • Repayment of short-term borrowings
  • Repayment of long-term borrowings

Cash Flow Analysis

To assess the liquidity and solvency of the company, organizations should monitor and analyze all these three different types of cash flow which are all included in the cash flow statement. Businesses evaluate their cash flow by comparing the items listed in those 3 types to ascertain where the money is coming from and going. They can make judgments about the present state of the business from this.

Bringing money in may or may not be a beneficial thing, depending on the type of cash flow. Spending money isn’t always a terrible thing, either.

Cash Flow Statement

The cash flow statement sometimes referred to as the statement of cash flows, is a statement that illustrates the cash flows into and out of the business to cover operations, financing, and investments. It demonstrates the connections between the income statement and the balance sheet as well as the connections between the two.

Is Cash Flow Statement necessary?

Many small business owners focus on the income statement and balance sheet instead of creating a cash flow statement. These business entrepreneurs believe that only financial achievement can be considered a success. However, a business may be lucrative even while its cash reserves are low. And as the Income Statement of an enterprise is always prepared on an accrual basis,  it may show profits in the Income Statement but the cash received out of these profits may be inadequate to run the business or vice-versa. 

Without cash, a company cannot pay its bills. Consequently, a profitable business could fail. In addition, the cash flow statement can identify slow payments, large debt repayments, and other issues that adversely impact cash and identify whether a company is doing well.

Cash Flow is important

Cash flow is important for businesses because it helps determine their future. If a business has a lot of cash coming in, then it can use this money to invest in new products or services and improve its operations.

Cash flow also determines whether a business should pay off debt or take out more loans. If revenues don’t cover expenses, then a company will have to borrow money from lenders or sell assets to generate enough cash to make payments on the debt it owes. This can put pressure on the company’s credit rating, which could make it more difficult for the company to obtain loans in the future.

A key question that investors ask about companies is how much cash they generate each year and what they plan to do with that money. This can be valuable information if you’re looking into buying shares of stock in a particular company because it tells you whether that company has enough resources available to operate effectively over time.

How cash flow determines the health and future of the business

  1. Positive cash flow allows you to be proactive in the way you do business.
    Having cash in the bank is great as it opens up an opportunity for investment in research and development, employee training, etc.
  1. Good cash flow management means a healthy business future. 
    Profit can be tied to assets, making it difficult to anticipate. But a business can forecast its cash flow. As a small business owner, one can plan for future income and expenses, and in doing so highlights any potential problems that may arise in the future, giving you time to prepare and avoid them.
  1. Bad cash flow affects business credit ratings and reputation.
    When applying for a business loan and getting approved, your interest rate is most likely high because your business is perceived as a high-risk investment. Businesses enjoying good cash flow most likely get a better interest rate or could well avoid the need for loans altogether.
  2. Good cash flow means your business could avoid taking on debt.
    As you need cash to pay staff and suppliers, buy stock, invest in the grand future of your business, etc., having a good cash flow means less likely to need on taking debt in the form of loans.

Cash Flow CFO

Without a doubt, cash is the lifeblood of the business. You need to have a solid strategy and the tools in place to monitor your current cash situation and predict what your future cash position will look like. 

Visit or call 410-952-6767 right away to speak with a cash flow CFO for a FREE consultation and gain access to a toolkit of cash management that can help you increase your cash flow, profitability, and growth.