Cash flow is king

Cashflow is King

This time last year, WePay reported that nearly half of business owners have been experiencing cash flow problems. While the state of the economy can bear some of the blame, the importance of cash flow is something that many business owners greatly underestimate.

So what exactly is cash flow and why is it so important? A company’s cash flow is the revenue stream that changes a cash account, or simply, the movement of cash in and out of a business.

Cash flow management is crucial for a business’s survival. Sufficient cash flow means that you have enough money on hand to pay creditors, employees, and other emergency bills that might pop up along the way. Having ample cash flow also gives you the opportunity to use the extra cash to expand your business. On the flip side, having little to no cash flow means that your company may be on the verge of bankruptcy.

Cash flow analysis can be classified into three separate areas- operational cash flow, investing cash flow and financing cash flow.

Operational cash flow comes from a company’s internal business activities (sales, labor, and purchase of materials). Cash that’s received from the sale of long-term assets, or spent on investments is called investing cash flow (purchasing capital). Financing cash is cash that comes from the issuance of debt and equity like loans, loan repayments, and ownership shares.

All three of these categories equal the net cash flows that are necessary to reconcile the cash balance.

A cash flow statement tells a company’s story. It helps the owners not only reflect on the financial health, but also allows them to budget for the future. It truly is the lifeblood of every business.

About the author: Antony Firth