Cash Flow
The movement of money into and out of a business, measuring actual cash availability.
Definition
Cash flow refers to the actual movement of money into and out of your business. Positive cash flow means more money is coming in than going out; negative cash flow means you're spending more than you're receiving. Unlike profit (which includes non-cash items), cash flow measures your actual liquidity—the money available to pay bills, employees, and obligations.
There are three types of cash flow: operating (from business activities), investing (buying/selling assets), and financing (loans, equity). For most businesses, operating cash flow is the primary focus, as it reflects whether day-to-day operations are sustainable without external funding.
Why It Matters
Cash flow is often called the lifeblood of business—and for good reason. Many profitable businesses fail because they run out of cash. You might have great sales and solid profit margins, but if customers pay slowly while expenses come due immediately, you can face serious cash shortages.
Understanding cash flow versus profit is essential. A $50,000 invoice booked in December improves December's profit, but if the customer pays in February, it doesn't help pay January's rent. Effective business management requires forecasting and managing cash flow alongside profitability.
Examples
- 1
A growing business books $100,000 in new contracts (revenue) but experiences negative cash flow because clients pay Net 60.
- 2
A seasonal business generates 70% of annual revenue in Q4 but must manage cash carefully through the slower months.
- 3
A consultant maintains 3 months of expenses in reserve to handle cash flow fluctuations from variable invoice timing.
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