cash & cash flow

Cash & Cash Flow: What It Is and What It Is not

For a company to prosper, it is not enough to keep track of revenue and profit. Cash flow must be kept healthy, too. Also, a company’s ability to steadily generate positive cash flow from its daily business operations is highly valued by investors. Cash flow is a fundamental aspect of business – one you must treat with great care and seriousness.

Cash flow is the movement of money in or out of a business, measured during a certain period of time. The reason analytics watch for a strong cash flow from operations (Operating Cash Flow) is that it can reveal a company’s true health. Firms with a positive cash flow are usually more interesting take-over targets. Operating cash, is by far the best measure of cash sources – and uses.

We’d like to share a few insights on Cash and Cash Flow:

What Cash Does

Cash comes in, and cash flows out.

Cash comes in to and out from the company through three “portals”;

  • Operations (when a company gets paid for goods or services)
  • Financial Services (interests received)
  • Investments (purchases of hard assets, buying or selling other businesses).

As mentioned earlier, analysts are especially interested in keeping track of cash flow derived from operations, Operating Cash. When paying for raw materials, labor, and transport for example, cash flows out. Inflows are called sources of cash and outflows are called use of cash.

The difference is called net cash flow.

Being Aware of a Positive or Negative Cash Flow

Cash flow can be positive – or negative.

Receiving more money than the company is spending creates a positive cash flow.

A positive cash flow is good since it makes a company more flexible. It can pay bills on time and is prepared to pay for unexpected expenses.

It is nice to have a positive cash flow, since it may quickly become hard to generate cash to meet overhead, payroll and other monthly expenses.

Similarly, if a firm spends more than it recieves, it can cause a negative cash flow. Spending more than the company should, may mean it risks becoming dependent on borrowing.
In difficult times, a business can’t underestimate the importance of having a cash reserve in the bank.

Seeing the Difference between Sales Revenue and Cash Flow

Some companies focus too much on revenue streams, forgetting cash flow. Both sales revenue and cash flow deal with the total amount of money the business receives and are important figures. However, keeping track of sales revenue is not enough. To make informed managerial decisions, prudent leaders don’t forget to take current cash flow status into account.

Sales revenue is the total amount of cash a business receives from customers as payment for its products or services. It is important to know that sales revenue only reveals the gross amount of money coming into a company through sales. Sales revenue is a measurement of sales. Thus it is a figure that does not measure other types of transactions.

Cash flow is different from sales revenue in two ways. Firstly, cash flow shows the total amount of money both coming into a company and moving out of it (compared to sales revenue that only tells about the money coming in).

Secondly, cash flow not only measures money coming in from sales. It also measures cash coming in from other sources.

….and Seeing the Difference between Profit and Cash Flow

Another common mistake is failing to know the difference between profit and cash flow. It may be devastating, especially for small firms. Whereas cash flow is the money that flows in and out of the firm’s operations, profit is what remains from sales revenue after all the firm’s expenses have been subtracted.

Knowing When Money is Needed

Cash flow refers to when a business needs money. Often, businesses spend money on salary and utility bills before they bring in any revenue. By plotting out when cash will come in and when it needs to be paid out, a business can identify when it needs cash on hand, and can do what it takes to make the cash available.

Companies often take out loans to survive until revenue comes in.
Cash flow is difficult to predict. Slow paying customers, insurers, unexpected expenses, and seasonal dips can easily turn a positive position gloomy.

A cash flow statement helps getting the big picture when it comes to cash.


“Revenue is vanity, cash flow is sanity, but cash is king”.