Cash Flow

Posted by Ryan Howard on Jul 30, 2018 8:10:00 AM

What is Cash Flow

Cash Flow is the flow of cash or cash-equivalent into and out of the organization, as a measure of a business' liquidity and overall performance, within a certain period of time.

The statement of cash flows will offer a measurement of how well the business is managing its cash to pay debts and fund operations. The cash flow statement will reveal where the cash is coming from and where it is spent, as well as the availability of cash (liquidity).

What affects Cash Flow?

The structure of the cash flow statement reveals that cash is related to three primary functions:

  • Operations
  • Investments
  • Financing

Cash from operations is client or customer payments for the goods or services sold by the business.

Investments are any time the business purchases an asset, such as equipment, real estate, stocks or bonds, with the expectation of a return on that investment. Selling these assets with a positive return results in cash into the business.

Financing is when the business takes on loans, debt or issues stock to access an availability of cash for growing the company.

Cash outflows are related to inflows. Operations outflows cover expenses such as payroll, utilities and the costs associated with selling the goods and services offered by the business. Investment outflows are payments made to purchase assets. Financing outflows are payments made against the loans or debt acquired to access cash. 

If the outflows are more than the inflows, the cash flow statement will reveal negative cash flow. If the inflows are more, then there is a positive cash flow.

How is Cash Flow Related to Accounts Receivable?

Cash flow is a measure of available cash within a certain time period. Accounts receivable and accounts receivable management affect the amount of available cash. 

As an example, accounts receivable increases when credit has been issued or future payments are promised to the business.  When accounts receivable increases, cash flow may be affected negatively. The collection of accounts receivable and proper management increase cash flow because the business has collected the cash that is owed.

See also: Common Cash Flow Challenges of Small Businesses and Accelerate Cash Flow with these Proven Collection Strategies

Topics: Glossary