Cash Flow

Cash flow simply describes the amount of money that comes into a business and the amount that is paid out on a running basis. It is, therefore, the flow of cash moving through the business’ bank account.

How Cash Flow Works

When a payment is made, this is termed a negative flow of cash and when money is received, it is seen as a positive flow of cash. In the general operation of a business, the cash flow rate should be positive—there should be more cash coming in than going out. Monitoring cash flow should be constant; there always needs to be enough cash available to meet expenses.

When looking at cash flow, one needs to be aware of the current situation of the business. There are many times when negative cash flow is merely a consequence of normal business. This might be the case when making a large purchase. An abnormally large cash outflow will reflect as negative cash flow, however, this purchase must be seen within the context of the operating conditions of the business at the time.

Over an extended period of time, the average cash flow rate of a business needs to be positive in order for it to remain sustainable. Cash flow, therefore, needs to be viewed separately within the long-term and short-term objectives of the business.