What You Need to Know About Cash Flow

Stated simply, cash flow is the total amount of incoming revenues versus outgoing expenses incurred by any company. Without positive cash flow, i.e. more incoming revenue than outgoing expense, it will be difficult for any company to stay in business for very long. Cash flow is critical for meeting payroll requirements, purchasing inventory, managing monthly bills, and paying every other expense incurred by normal business operations. Here is a closer look at why cash flow is often called the lifeblood of any business.

Cash flow in detail

To quickly determine the overall health of any business, all you’d have to do is take a look at its cash flow statement. On this statement, you’ll see how much cash is available for operations, how much is used for investment, and how much is allocated toward financing. When a company is considered to have positive cash flow, that means its liquid assets are on the rise, as opposed to diminishing or remaining static.

When this situation is true, a company can use that cash flow to pay off debts, grow the business, pay expenses, establish a buffer against future uncertainties, and even return a dividend to shareholders. Any company in such a positive situation will also be somewhat insulated against future economic downturns, because it won’t have to incur the exorbitant cost of high-interest borrowing.

Profitability vs. Liquidity

It may seem strange, but even companies which are highly profitable can be in serious difficulty if cash flow is inadequate. Profits can be tied up in inventory, in accounts receivable, or even in capital expenditures, and this can leave a company without the liquidity to meet other expenses on an ongoing basis.

Deceptive cash flow

In some cases, cash flow can be deceptive, in that it can give a false indication of a company’s financial health. For example, if a company has surplus cash flow because it has taken on a high level of debt from loans, that could be a very unhealthy situation for the long-term, because any temporary positive cash flow will eventually be overwhelmed by the terms of repayment.

What to do about cash flow issues

If your small business is having an issue with cash flow that threatens your daily operations, please contact us at Revap Group Capital to discuss ways the situation can be relieved. We understand that cash flow is critical to business success, and we are willing to help your company maintain its all-important cash flow to keep the business running smoothly.

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