What is cash flow?

Cash flow (definition)

Cash flow is a measure of how much money a business has (or will have) at a given point in time. It reflects a business’s ability to pay its bills.

Cash flow shows how much money you have available to spend. You can check your bank balance to see what your immediate cash flow looks like but most businesses are keen to get a longer term view.

What is cash flow for a business?

When assessing their cash flow, a business can look forward by doing a cash flow forecast (also known as a projection), or look backward by doing a cash flow statement.

  • Cash flow forecasts or projections account for upcoming bills and payments to predict how much money the business will have in the future.
  • Cash flow statements review the past month or year to show which parts of the business generated cash and which parts spent cash.
A dashboard shows how a business’s cash flow projection changes in response to income and expenses.

Small businesses can get a picture of future cash flow by accounting for upcoming bills and payments (example from Xero dashboard).

What affects cash flow

The amount of cash in the business is driven by three things:

  1. Operations – income from selling products and services, minus the expense of delivering those products and services
  2. Investments – money spent on big assets like real estate or equipment, offset by money received when reselling similar big ticket items
  3. Finance – money received as loans, offset by money repaid to banks. Shareholder investments are also captured here, and these are offset by dividend payments.

Ideally, cash flow most commonly comes from operations. It won’t be sustainable if all your cash comes from loans, investments, or selling assets.

Importance of cash flow

A business needs good cash flow to pay bills and keep trading. Having spare cash also gives a business the opportunity to pursue new opportunities, in line with the adage that you have to spend money to make money. Equally importantly, good cash flow alleviates a lot of financial stress for business owners and managers.

A quick note on the meaning of ‘cash’

Cash is not just money in the till or bank. It includes ‘cash equivalents,’ which is anything that can be sold for a known price, at short notice (usually within about 3 months).

How cash flow differs from free cash flow, working capital, and liquidity

Cash flow is a measure of spending power, similar to free cash flow, working capital, and liquidity. Each of these terms has its own complexities, but here’s roughly how they compare:

  • Cash flow refers to the general availability of cash
  • Liquidity shows how easily a business can cover upcoming costs (expressed as a ratio)
  • Working capital shows how much money will be left after covering those upcoming costs
  • Free cash flow is the amount of cash left after making capital investments

See related terms

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Disclaimer: This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.