What is Cash Flow and Why is It Important?

This is the first in a three-part series of blogs and videos about cash flow and cash flow forecasting – which is simply the process of predicting your business’s cash flow.

I presented a webinar earlier this year talking about this concept – you can watch the first part of the webinar here. With a more unpredictable future, we need to get better at developing models for how we look at cash flow.

Most business owners don’t predict their cash flow. Many have what they consider “intuition” about cash flow. But do you monitor your intuition against actual data? If not, you may be making important business decisions that are not founded in fact.

You can run a business at a loss, but not without cash – it’s the lifeblood of any business. Your cash flow statement tracks the movement of cash through your business during a particular period of time.

Positive cash flow means that more cash is coming in than going out, negative cash flow means more is going out than coming in. All businesses have periods of both. Different types of cash flow may also be positive or negative. There are three types of cash flow:

  • Operating cash flow is the amount of cash generated from day-to-day operations which may fluctuate based on working capital, receivables, payables, etc. Your operations cash flow must be generally positive to produce long-term positive cash flow.
  • Investing cash flow is money you invest back into your business for things like purchases of machinery, furniture, or computers. If you don’t borrow money for these expenses you are using cash flow from operations to reinvest. Investing cash flow is often negative.
  • Financing cash flow is money that is used to pay investors and creditors. If you take on debt now or in the future, keep an eye on financing cash flow over time – it can be either positive or negative.

How these various types of cash flow add up reveals your overall cash flow situation. Negative cash flow is not necessarily a negative for your business as long as it is not negative long-term. Monitoring the status and direction of your cash flow is the reason you need to put together a cash flow forecast.

Watch my short video to learn more. Then contact me to set up a complimentary call to discuss your own cash flow forecasting needs.

Rick Arthur

Written by

Rick Arthur is a CFO whose expertise is built on Financial Intelligence and 35 years in senior financial roles. Coupled with a CEO’s perspective and the experience of building his own $20 million company, he brings a unique depth of insight into business from the top down. Wired to get to know people, Rick works hand-in-hand with business owners of intentional, growth-oriented companies, solidifying relationships as a trusted advisor and confidant to his clients. He leverages his experience to help business owners gain traction and stay laser-focused on the company’s vision, cash flow, and profitability – all while creating big picture solutions for strategic planning, growth and sustainable success.