💵 What is Cash Flow?
Definition: Cash flow is the movement of money into and out of a business over a period of time.
- Cash inflows — money coming IN (sales, loans, investments, interest received)
- Cash outflows — money going OUT (rent, wages, stock purchases, loan repayments)
- Net cash flow = Total inflows − Total outflows
Cash flow is about TIMING — when money actually enters and leaves the bank account, not when sales or purchases are recorded 🕐
❗ Why Cash Flow Matters
Cash is the lifeblood of any business. Without cash, a business cannot function — even if it is profitable on paper.
- Pay suppliers on time to maintain relationships
- Pay employees — late wages cause staff to leave
- Cover daily operating costs (rent, utilities, insurance)
- Invest in growth opportunities when they arise
- Repay loans and interest to avoid penalties
More businesses fail from running out of CASH than from being unprofitable. Cash flow is the #1 cause of small business failure! ☠️
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⚖️ Cash Flow vs Profit
This distinction is critical and comes up in exams constantly.
- Profit is an accounting measure — revenue minus costs over a period
- Cash flow is the actual money moving in and out of the bank
- A business can make a profit but have negative cash flow (e.g. customers haven't paid yet)
- A business can have positive cash flow but make a loss (e.g. received a large loan)
- Profit includes non-cash items like depreciation; cash flow does not
Example: A builder completes a $50,000 project in January (profit recorded) but the customer doesn't pay until April. In February, the builder has profit but NO CASH to pay his workers.
🏦 Opening and Closing Balances
Formula: Closing balance = Opening balance + Net cash flow
- Opening balance — cash in the bank at the START of the period
- Net cash flow — inflows minus outflows during the period
- Closing balance — cash in the bank at the END of the period
- This month's closing balance becomes next month's opening balance
Example: Opening balance = $5,000. Inflows = $12,000. Outflows = $14,000. Net cash flow = $12,000 − $14,000 = −$2,000 Closing balance = $5,000 + (−$2,000) = $3,000