Cash flow is the virtual or real movement of money. In a narrow sense, cash flow is a currency payment from one bank to another. For funding purposes, cash flow describes payments in or out of a financial product, business or project.Cash flow is a variation of debt financing where the lender provides working capital for your business. The security for the loan is the expected cash flow that you (the borrowing company) generate. Cash flow is closely connected with the concepts of interest rate, value and liquidity.The amount you borrow depends on the value of the asset (security), estimated cash flow and the business’s investments such as stocks.In business financials, the total net cash flow of a company over a defined period is equal to the change in the cash balance during the same period. Cash flow is negative where cash balance decreases and positive if cash balance increases.
Just like the body needs food and water to live, so does a business needs cash flow to survive.
An invoice is not physical cash. Until you have the funds, you have no cash. In the meantime, you need to pay your suppliers. Cash flow provides liquidity.
Other reasons why cash flow is important include:
Often, cash flows are changed into measurements that provide information on a company’s value and financial position to calculate a project’s value or rate of return.
Cash inflow/income is generated from the sales of services or goods, borrowed funds or money earned through investments. It also includes income from outstanding invoices and your bank balance.
Cash outflows/ expenditure includes money spent buying equipment, payment to vendors, salaries, rent and maintenance payments.