Cash flow describes the movements of cash into and out of a business
When you look at the bank statement of any business, you soon realise that cash flow is a dynamic and often unpredictable part of business life. In business, cash is always on the move…
- Cash flows into the bank account when customers pay for their sales, when a loan is received from the bank, interest is received or when assets are sold.
- Cash flows out of the bank account when suppliers are paid, employee wages and salaries are paid; interest is paid to the bank and so on.
You need to be able to distinguish between:
Cash inflows: movements of cash into a business
Cash outflows: movements of cash out of the business
The difference between the cash inflows and cash outflows during a specific period (e.g. a week, month) is known as the “net cash flow”.
The challenge for any business (particularly a start-up) is to ensure that it manages its net cash flow to ensure that it does not run out of money.
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