Cash flow refers to the money going in and out of the business over a given period.
The aim is to have more money coming into the business than going out, thus having a positive cash flow.
Cash that comes in to the business might include:
- Sales of products and services
- Money owed from clients and customers provided with products and services on credit
- Late payments received from customers
Cash going out for expenses and purchases might include the following examples:
- Utilities (electric, water etc)
- Office supplies
- Payment for taxes
Having a good cash flow, means being prepared and able to meet any outgoings expenses in the given period.
Running out of money is one of the main reasons businesses fail.
In order to sustain a healthy cash flow, some larger purchases may need additional funding.
Examples might include the purchase of a vehicle or machinery for the business.
Usually this is financed by drawing money from the business funds or from an external source.
Keeping track of our finances and maintaining a positive cash flow will ensure a business runs smoothly.