Ever wondered what is cash flow? Understanding
basic concepts of cash flow will help you plan for unforeseen eventualities that nearly every business faces. Although poor management is normally given as main cause for business failure, poor cash management is running a close second as a common stumbling block. Cash is ready money in bank or in business. It is not inventory, it is not accounts receivable (what you are owed), and it is not property. These can potentially be converted to cash, but can't be used to pay suppliers, rent, or employees. Profit growth does not necessarily mean more cash on hand. Profit is amount of money you expect to make over a given period of time. Cash is what you must have on hand to keep your business running.
Cash flow refers to movement of cash into and out of a business. Watching cash inflows and outflows is one of most pressing management tasks for any business. The outflow of cash includes those cheques you write each month to pay salaries, suppliers, and creditors. The inflow includes cash you receive from customers, lenders, and investors.
There are two types of cash flow, positive and negative. Positive cash flow means, if its cash inflow exceeds outflow, a company has a positive cash flow.
Conversely, negative cash flow means, if its cash outflow exceeds inflow, a company has a negative cash flow. Reasons for negative cash flow include too much or obsolete inventory and poor collections on accounts receivable.
