What Is Cash Flow?
Cash flow is the net movement of money into and out of a business over a period of time. Positive cash flow means more cash came in than went out; negative cash flow means the reverse — a critical signal of whether a business can meet its obligations.
What cash flow is and why it matters
Cash flow is distinct from profit. A business can be profitable on the income statement yet run out of cash if customers pay slowly or it ties up money in inventory — which is why cash flow, not profit, is what keeps the doors open. It's analyzed in three categories: operating (from core business activity), investing (buying or selling assets), and financing (debt and equity). Watching cash flow reveals timing problems the income statement hides and is often the first metric a lender or investor scrutinizes.
A worked example
In a month, a business collects $80,000 from customers and pays $55,000 in operating costs, giving $25,000 in operating cash flow. It also spends $30,000 on new equipment (investing) and draws $20,000 from a loan (financing). Net cash flow for the month = $25,000 − $30,000 + $20,000 = $15,000 positive, even though the equipment purchase alone was larger than operating cash — the financing inflow covered the gap.
How firms handle it today
Firms derive cash flow from reconciled books, producing the statement of cash flows at close and often a simpler cash-flow forecast to help clients anticipate shortfalls.
Related terms
- Statement of cash flows
- Working capital
- Liquidity
- Net income
- Forecasting
FAQ
What's the difference between cash flow and profit?
Profit is revenue minus expenses on the income statement; cash flow is the actual movement of money. A business can be profitable but cash-poor.
What are the three types of cash flow?
Operating (core business), investing (assets), and financing (debt and equity) cash flows.
Why is cash flow so important?
Because a business needs cash to pay bills and payroll — running out of cash, not lack of profit, is what most often causes failure.