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Cash flow shows how much money truly moves in and out of your business during a specific period. For business owners, this is highly significant: a company can show profit but still face difficulties if there is not enough cash available to pay bills.
In this article, we explain the exact meaning of cash flow, what the differences are compared with profit, and the different types of cash flow that exist.
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The definition of cash flow is straightforward: the difference between your income and your expenses over a given period. It shows how much liquidity is available to meet obligations, make investments, or pay off debt. In other words, it represents the net movement of money within your company.
Cash flow is essential for the overall health of your business. A positive cash flow means more money is coming in than going out. This allows you to pay suppliers, staff, and other obligations on time.
With negative cash flow, the opposite is true: more money leaves the business than enters it. Even when a business shows profit on paper, issues can arise if customers are late in paying.
A clear understanding of what cash flow in finance is prevents unwelcome surprises and ensures you stay in control of your company’s finances.
Cash flow and profit are often confused, but there is a clear distinction:
Example: you issue an invoice for £ 10,000 to a client. On paper, you record revenue and profit. But until the client pays, that amount is not part of your cash flow. This distinction highlights why cash flow is often a more reliable indicator of your company’s financial position.
In practice, three types of cash flow are distinguished:
Together, these three categories provide a full picture of the financial status of your business.
Suppose you receive £ 25,000 from clients this month and pay £ 18,000 in costs and wages. Your cash flow is then £ 7,000. This is a positive result, meaning your business retains funds to invest, reserve, or repay debts.
A cash flow forecast estimates the future movement of cash in and out of your business. It helps you plan ahead, avoid shortages, and ensure there is sufficient liquidity to meet obligations. Forecasting is a vital tool for long-term stability.
Want to know how to apply this in your own company? In our detailed article, we explain step by step how to calculate cash flow and which formulas you can use.
Article: Cash flow calculation
With Payt, you always have insight into your financial position. Our software automates credit control, ensuring invoices are paid faster and improving your cash flow over time. Curious about what Payt can do for your business? Download our brochure or schedule a free demo.
By ensuring invoices are paid quicker, keeping fixed costs under control, and following up consistently with clients.
A healthy or cash flow positive situation means more money consistently comes in than goes out, leaving room for investment and unexpected costs.
Cash flow refers to the inflow and outflow of money during a set period, while liquidity is about the cash immediately available.
Many companies calculate this monthly, but for businesses with tight margins or high transaction volumes, weekly calculation may be beneficial.
Free cash flow refers to the cash left after covering operating expenses and capital expenditures. The free cash flow definition highlights funds available for expansion, debt reduction, or dividends.
