Cash flow is the total amount of money being transferred into and out of a business. This shows the liquidity of a business. In accounting terms it’s described as the amount of cash available at the beginning of a period and the amount at the end of that period. It’s positive if the closing balance is higher than the opening balance. This indicates that a company’s liquid assets are increasing, which means that it will be able to settle debts, reinvest in its business, return money to shareholders, pay expenses and provide a buffer against future financial changes.

Basically, as a business owner, you’ll want this closing balance to be as high as possible.

Why is cash flow important?

Cash flow is used to assess the quality of a company’s income. It indicates whether the company is positioned to remain solvent or not.

Cash flow is distinguished from net income because it represents a true reflection of a company’s financial position. As a business owner or manager, you want net cash flow to be more than net income. This will indicate that your company is bringing in actual cash, which will be useful for settling short-term liabilities and is a general indicator of a company that is run efficiently.

Cash flow is reported on a cash flow statement. This statement is used in conjunction with other financial statements to assess a business.

This document is divided into three distinct categories:

Operating cash flow – this involves day-to-day business activities.

Investing cash flow– this section reflects investments made through acquisition. Proceeds from the sale of any assets can be included here.

Financing cash flow– this relates to a company’s investors and creditors. It indicates how much the company owes to creditors. It also includes any capital contributed by owners of the company.