What is Cash flow? Cash flow is the common business term used to describe the amount of cash revenue a business, institution or other enterprise takes in versus its expenses. ("Cash" here is understood to include bank deposits, transfers and debits.) Every wise cash management policy should prioritize cash flow. A positive cash flow ratio is considered the essential indicator of any operation's ongoing viability.

More Important than Making a Profit

It's possible for a business to demonstrate profitability on paper without having positive cash flow, as profitability is defined as the difference between the cost of producing something and the price for which it's sold. A company can be profitable and not generate enough cash to cover its operating expenses and debt. While any business can experience a restricted period of time with a negative cash flow, cash flow needs to be consistently positive over the long run for a business to be considered financially healthy. Investors, shareholders, lenders, and even potential employees all have a stake in a company's long term financial stability.

Carefully Monitored

Cash flow is generally analyzed over specific, limited time increments, such as monthly, quarterly (over the course of a year) or yearly. Some businesses manage negative cash flow by requesting a short-term line of credit from the bank to tide them over during cash shortfalls, but this can be difficult to obtain for smaller businesses, particularly during economic downturns.

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