What is Cash Flow? – Part 1

Cash Flow is the Pulse of Your Business

Do you know the pulse of  your business? The realistic fact is that many small business owners do not fully understand their cash flow statement. This is shocking, given that all businesses essentially run on cash, and cash flow is the lifeblood of your business.

Some business experts even say that a healthy cash flow is more important than your business’s ability to deliver its goods and services! That’s hard to swallow, but consider this: if you fail to satisfy a customer and lose that customer’s business, you can always work harder to please the next customer. But if you fail to have enough cash to pay your suppliers, creditors, or employees, you’re out of business!

What Is Cash Flow?

Cash flow, simply defined, is the movement of money in and out of your business; these movements are called inflow and outflow. Inflows for your business primarily come from the sale of goods or services to your clients or customers. The inflow only occurs when you make a cash sale or collect on receivables, however. Other examples of cash inflows are borrowed funds, income derived from sales of assets, and investment income from interest.

Outflows for your business are generally the result of paying expenses. Examples of cash outflows include employee wages, purchasing inventory or supplies, purchasing fixed assets, operating costs, paying back loans, and paying taxes.

Cash Flow Versus Profit

Profit and cash flow are two entirely different concepts, each with entirely different results. The concept of profit is somewhat broad and only looks at income and expenses over a certain period, say a quarter or fiscal year. Profit is a useful figure for calculating your taxes and reporting to the IRS and for an assessment in the bottom line of your business.  Cash flow, on the other hand, is a more dynamic tool focusing on the day-to-day operations of a business. It is concerned with the movement of money in and out of a business. But more important, it is concerned with the times at which the movement of the money takes place so that you are able to manage all this effectively and efficiently.

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