fundamentals

cash flow

The net amount of cash moving in and out of a business or personal account over a period of time.

Example

“Despite being profitable on paper, the company struggled because of poor cash flow.”

Memory Tip

Cash FLOWS like water — in and out. Positive cash flow means more comes in than goes out.

Why It Matters

Cash flow is crucial because it shows whether you have enough money available to pay your bills and expenses right now, not just whether you are profitable overall. Understanding your cash flow helps you avoid running out of money even if you appear to be making good income on paper.

Common Misconception

Many people confuse cash flow with profit, thinking that if their business or personal account shows a profit, they have good cash flow. However, you can be profitable but still run out of cash if money is tied up in inventory, unpaid invoices, or large upcoming expenses.

In Practice

A freelancer might earn 5000 dollars in revenue in January but not receive payment until March, while their rent of 1200 dollars and other expenses are due every month. Even though they made 5000 dollars, their actual cash flow in January and February is negative, meaning they need savings or a loan to cover the gap until the payment arrives.

Etymology

Compound of cash (immediate money) and flow (movement) — the movement of money.

Common Misspellings

cashflowcash flocash floecashfow

Related Terms

revenue profit liquidity

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Other fundamentals terms you should know

assetAnything of value owned by a person or company that can be c…capitalWealth in the form of money or assets used to start or expan…compound interestInterest calculated on both the initial principal and the ac…creditThe ability to borrow money or access goods and services wit…debtMoney borrowed by one party from another that must be repaid…equityThe value of ownership in an asset or company after all debt…