The Definition of Cash Flow

Whether you own a small or large business, you are already aware of the need for cash reserves and working capital. This is often called a companies cash flow. It’s the amount of cash or cash-equivalency that a company both receives from consumers and spends on its own operations to creditors. If a company wanted to take inventory of their financial health, this first step would be look at the available cash coming into the business, where it is coming from and how much cash is going out.


For the business owner, this flow can be either a negative or positive ratio. Calculating where you stand in according to positive or negative occurs by auditing the cash balance at the beginning of new period (often called the opening balance) against the cash balance at the end of the prior period (the closing balance). This subtraction to determine available funds can occur on a monthly, quarterly or yearly basis. If you have a positive difference, it means you have retained more cash at the end of a specified timeframe. If the balance is negative, it means your expenditures have exceeded the cash that has come in through the month and left you falling behind.

Companies will prepare cash flow statement to determine where the cash is coming from and where it is going out. There are usually three categories included in this analysis: day-to-day transactions for operational flow, investing cash flow which is used for expansion needs, and a flow that supports financing requirements. These include the transactions that dealing with dividend payouts to stockholders.


A company’s balance sheet and income statements are also used when analyzing the cash flow of a company. The level might be headed toward a positive conclusion, if the company is in the process of selling some assets. However, if the assets are being sold to pay off company debt, there needs to be additional investigation into the situation. If a company is not reinvesting their cash, whether through daily operations or selling an asset, it presents a negative for the stockholders. The business isn’t capitalizing on opportunities to expand the business or diversify their holdings.


There are ways that you can temporary fix a shortage with a cash flow, and these can range from business loans to invoice factoring. However, instead of just looking for a temporary solution, determine the reason for the shortage and work to establish a consistent strategy to maintain adequate working capital.

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