What Does Cash Flow Mean?
In the simplest terms, cash flow is the cash going out and coming in to the business. Cash flow is a revenue or expense stream that changes a cash account over a given period. Cash inflows usually come from one of three activities – financing, operations or investing. Cash outflows result from expenses or investments. This holds true for both business and personal finance. How important is it to be aware of cash flow? Bear in mind that more businesses fail for lack of cash flow than for lack of profit.
A business can generate an accounting statement called the “statement of cash flows”, which shows the amount of cash generated and used by a company in a given period. Although, cash flow can be used as an indication of a company’s financial strength, most businesses overlook this important tool!
It is important to understand that sales and costs and, therefore, profits do not necessarily coincide with their associated cash inflows and outflows. This is because that although a sale is secured and goods are delivered, the related payment may be deferred as a result of giving credit to the customer or simply because the customers are slow paying! Meanwhile, payments must be made to suppliers, employees and used to purchase new equipment and so forth. What does this all mean? Well, the net result is that cash receipts often lag behind cash payments and although profits may be reported, the business can experience a short-term cash shortfall. This is why it is essential to forecast cash flows as well as project likely profits.
The good news is it is easy to produce a computer generated a cash flow statement and to do a projection of cash flows using Quick Books software. Used effectively, a projection can help prevent major planning errors, anticipate problems, identify opportunities to improve cash flow or provide a basis for negotiating short-term funding from a bank.
Please Note : When preparing cash flow projections, be aware of the following risks:
- Overstating sales forecasts
- Underestimating costs
- Ignoring historic trends
- Making unduly-optimistic assumptions about the availability of credit
These problems can arise as the result of a lack of foresight or knowledge, or because of excessive optimism. New business owners can achieve the desired results by consulting with a professional to understand cash flow projections.

