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Cash Flow Basics For Your Company Explained

Cash is constantly moving in and out of businesses. For example, when a retailer purchases inventory, money flows out of the business to its suppliers. But, when that retailer sells something from its inventory, cash flows into the business from the consumer. 

Cash flow is the net balance of cash moving in and out of a business at a specific point in time. It can be reflected positively or negatively. Positive cash flow indicates that a company has more money coming in than out and negative cash flow indicates that a company has more money moving out of it than into it. So obviously a company would like to see a positive cash flow value on reports and forecasts.

The Cash Flow Categories

Cash flow can be broken down into three major categories:

Operating Cash Flow is the net cash generated from a company's normal business operations.

Investing Cash Flow is the cash generated or spent on investment activities. This can include purchases of physical assets, investment in securities, or the sale of both securities and assets.

Financing Cash Flow includes all proceeds gained from issuing debt and equity as well as payments made by the company. It is the net cash generated to finance the company and may include debt, equity, and dividend payments. 

The Cash Flow Statement

The cash flow statement is intended to provide a company with a detailed picture of cash activity during a specified period of time. The cash flow statement is separated into the three cash flow categories mentioned above.

Based on the cash flow statement, you can see how much cash different types of activities generate, then make business decisions based on the overall analysis of financial statements.

Cash Flow vs. Profit

The main difference between cash flow and profit is that profit indicates the amount of money left over after all expenses have been paid. Cash flow indicates the net flow of cash in and out of the business. 

Investors and business owners often look for metrics in which they can understand the health of a company - cash flow and profits can do exactly that.

The Cash Flow Big Picture

Cash flow is the picture of the company's financial standing in the context of cash at a specific moment in time.  A business that lacks positive cash flow cannot cover its financial obligations. 

Alternatively, a business that is cash flow positive will continue to operate without the prospect of insufficient cash crippling operations.  A company that runs out of money will close its doors and halt operations due to the inability to pay employees and satisfy financial obligations. 

This is precisely why every business owner and manager should emphasize the importance of positive cash flow, sacrificing as necessary to maintain a net positive cash flow. 

Having the ability to accurately and regularly view a company's cash flow is important for planning and goal setting. Utilizing an ERP system that has customizable dashboards makes viewing statistics and reports much easier for business owners and managers.

Along with dashboards, having a dedicated team of professionals handling the accounting for a business will lead to a host of other advantages. To learn more about how a dashboard can help a business or how outsourcing to a team of professionals can assist a business with cash flow, reach out to today.

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