Cash Flow

Cash flow is often described as the lifeblood of a business. A company can be profitable on paper (accrual accounting) while running out of cash, or cash-flow positive while technically unprofitable. This distinction matters because you pay employees, suppliers, and landlords with cash, not with accrued revenue. A profitable business that runs out of cash still goes bankrupt.

Cash flow is divided into three categories. Operating cash flow comes from core business activities (customer payments minus operating expenses). Investing cash flow relates to long-term assets (buying equipment, acquiring companies). Financing cash flow involves debt and equity (loans received or repaid, investor capital, dividends paid). A healthy business generates positive operating cash flow that funds investments and reduces debt.

Cash flow management is particularly challenging for growing businesses. Revenue growth often requires upfront investment in inventory, staff, and marketing before cash from new customers arrives. This growth cash flow gap has killed many profitable businesses. Strategies to improve cash flow include negotiating shorter payment terms from customers, longer payment terms with suppliers, upfront or annual billing, and maintaining a cash reserve.