What is cash flow?
Learn what cash flow is, how to calculate it, and simple ways to keep money moving in your small business.
Published Thursday 23 July 2026
Table of contents
Key takeaways
- Cash flow is the movement of money in and out of your business over a period of time, and timing matters as much as the total amount.
- Even a profitable business can run short of cash when income and expenses are badly timed.
- You can look forward with a cash flow projection or backward with a cash flow statement to keep track of your position.
- Simple habits like invoicing promptly, chasing what you're owed and forecasting regularly help you stay on top of cash flow.
What is cash flow?
Cash flow is the movement of money in and out of a business over a period of time. It shows whether you have enough money coming in to cover what's going out.
Timing is a big part of cash flow. You need enough cash on hand when payments come due, or you risk defaulting. Even profitable businesses can hit cash flow problems when expenses land at the wrong moment.
When people talk about cash, they mean more than the money in your till or bank account. Cash also includes cash equivalents, which is anything you can sell for a known price at short notice, usually within about 3 months.
What affects cash flow
The amount of cash in your business comes from three areas. Together they explain where your money is coming from and where it's going.
- Operations: money from selling products and services, minus the cost of delivering them
- Investing: money spent on big assets like property or equipment, offset by money you get back when you sell those assets
- Financing: money received as loans or shareholder investments, offset by loan repayments and dividends
Small businesses can get a picture of future cash flow by accounting for upcoming bills and payments (example from Xero dashboard).
Ideally, most of your cash flow comes from operations. Relying on loans or selling off parts of the business isn't sustainable over the long term.
How to calculate cash flow
You can work out cash flow with a simple sum. It compares the money coming in against the money going out over a set period.
- Net cash flow = total cash in minus total cash out over a period
- Total cash flow = operating cash flow plus investing cash flow plus financing cash flow
A positive result means more money came in than went out. A negative result means the opposite, and it's a sign to look closely at your timing and spending.
How to measure cash flow
You can measure cash flow in two directions. One looks ahead at what's coming, and the other looks back at what already happened.
The forward view is a cash flow projection, sometimes called a forecast. It plots your upcoming income and expenses on a timeline so you can predict how much money you'll have in the weeks and months ahead. For more on staying ahead of your numbers, see the Xero guide to managing cash flow.
The backward view is a cash flow statement. It reviews a past month, quarter or year to show how much cash came from operations, financing and investing, so you can check your cash flows are sustainable and not too reliant on borrowing.
Cash flow vs profit
Cash flow and profit sound similar, but they measure different things. It helps to know which one you're looking at.
Handy resources
Advisor directory
You can search for experts in our advisor directory
Cash flow projection template
Download our free template to help predict cash flow for your business
Business analytics with Xero
See future cash flow, check financial health and track metrics.
Profit is your revenue minus your expenses on paper. Cash flow is the actual money moving in and out of your accounts. A profitable business can still run short of cash if the timing of payments is off, which is why both figures matter.
Cash flow vs free cash flow, working capital and liquidity
Cash flow is a measure of spending power, and it sits alongside a few related terms. Each has its own detail, but here's roughly how they compare.
- Cash flow refers to the general availability of cash
- Liquidity shows how easily you can cover upcoming costs, expressed as a ratio
- Working capital shows how much money is left after covering those upcoming costs
- Free cash flow is the cash left after you make capital investments
If you'd like to go deeper on one of these, the Xero guide to working capital breaks it down further.
Positive vs negative cash flow
Cash flow can be positive or negative in any given period. The difference tells you a lot about the health of your business.
Positive cash flow means more money is coming in than going out. Negative cash flow means more is going out than coming in.
Good cash flow lets you pay your bills, keep trading and pursue new opportunities when they come up. It also reduces a lot of the financial stress that comes with running a business.
How to improve cash flow
A few practical habits can make a real difference to your cash flow management. Try building these into your regular routine.
- Invoice promptly so money starts coming in sooner
- Keep on top of who owes you and follow up on late payments
- Time your own payments to suppliers so they don't all fall due at once
- Build a cash buffer to cover quiet periods or unexpected costs
- Forecast regularly so you can spot a shortfall before it arrives
See your cash flow clearly with Xero
Keeping track of your cash flow is far easier when your numbers are in one place. Xero brings your bank transactions, invoices and bills together so you can see where your money is at a glance.
With projections and reporting built in, you can look ahead, plan for quiet periods and make confident decisions. Try Xero and get one month free.
FAQs on cash flow
Here are answers to some frequently asked questions about cash flow to help you fill in the gaps.
What does cash flow mean in business?
In business, cash flow is the money moving in and out of your accounts as you trade day to day. It reflects your ability to cover costs right now, rather than what you've earned on paper.
What is the difference between cash flow and profit?
Profit is what's left once you subtract expenses from revenue, while cash flow is the real money entering and leaving your accounts. You can be profitable and still be short of cash if payments are timed poorly.
Is cash flow the same as revenue?
No. Revenue is the total income you earn from sales, while cash flow also accounts for the money going out and the timing of every payment.
What is positive cash flow?
Positive cash flow means more money came into your business than went out over a given period. It's a sign you can comfortably cover your costs and set some aside.
Related terms
Learn more about cash flow
Handy resources
Advisor directory
You can search for experts in our advisor directory
Cash flow forecast template
Download our free template to help predict cash flow for your business
Business analytics with Xero
See future cash flow, check financial health and track metrics
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.