Cash flow is the lifeblood of your organization that will help you to undertake the various growth activities in your business. Through a keen eye on your cash flow, it will help you to measure the liquidity position. So, you can make effective strategies for averting any debt crisis within your organization. In this article, we will discuss in detail what cash flow is and why your business must maintain a healthy amount.
Understanding Cash Flow
So, the income generated and the revenue expensed on the growth activities require the movement of the cash, either measured virtually or the physical movement of the cash: in the crux, this is the basis of the cash flow. There can be multiple avenues of income and an equal amount of places where your business can expend capital resources.
The analysis of this cash flow will reveal several insights into your business that will ensure the viability of your business. A cash flow analysis is the benchmark to measure your financial stability and flexibility.
So, a positive cash flow means that your organization is capable of paying its debts and has a high level of liquidity, which is necessary to reinvest in business, pay salaries, etc.
What is a Cash Flow statement?
A cash flow statement is a document with an income statement and a balance sheet of the organization with the net increase and decrease in cash flow and cash flow equivalents.
A positive cash flow indicates that a company is retaining cash that will help them to pay their obligations in the long term. You can read in detail about the benefits and advantages of cash flow for MSMEs in this article.
Different Types of Cash Flow
There are different types of cash flow based on the various streams of revenue and expenditure:
- Cash Flow From Operations: The cash flow generated directly from the sale and purchase of goods, subtracting the operational costs paid in cash from sales revenue.
- Cash Flow From Investing: All the revenue and expense generated from the investing activities comes under this cash flow. Although this metric can be negative, you should not be worried because it can be the investment done in the R&D of a product.
- Cash Flow From Financing: The part of the cash flow used for funding the capital of the business is under the cash flow from financing.
Why Cash Flow and Profit are Equally Important
Understanding the difference and importance of cash flow and profit is crucial because these metrics are somewhat interdependent. With greater cash flow, you can invest in the newer avenues of the business, thus resulting in more profit. For more understanding, read this article!
A cash flow is the lifeline that lays the foundation stone for the expansion of the business. In the end, having a positive cash flow is necessary for your business because it will determine the future direction of your organization. Therefore, a constant measurement and evaluation of this metric will result in the better growth of your business.