I read a lot about the definition but I can’t really get the hang of it.
Is it the cash that the company is left with at the end of the period? (Meaning the cash in their bank accounts *hypothetically*)
In: 14
Let’s say there are two companies, Joe’s Widgets and Moe’s Widgets. Both of the sell $12M of widgets a year, and both make $6M profits a year.
Now Joe’s Widgets sells retail, and so customers pay immediately. In any given month, you sell $1M of stuff and make $500K profit. At the end of every month you have $500K more cash than you started with. This is good cash flow, you can cover you expenses and have money available to give raises, buy new equipment, whatever you want.
Moe’s Widgets has one big customer, and they want a delivery of $6M of stuff every six months. So each month, Moe’s has to pay $500K of expenses to make stuff, so each month they have $500K less cash then when they started, until they make the big shipment. They make $1.5 million profit when they ship, but the proceeding months were tough. This is poor cashflow.
It’s important to note that both companies are equally profitable, the difference is just a steady influx of money vs feast and famine.
A lot of people are responding and talking about companies like the OP, but it’s worth noting that the concept of cash flow is more general and can apply equally well to personal finances, cash flows from individual rental properties, and the like.
It’s a complement to an income statement, which shows profits and losses. The two aren’t always the same, because not everything involves cash. For example, some businesses that produce positive cash flow might be unprofitable because they also have depreciation expenses (i.e. the decline in the value of an asset). Similarly, an individual might have negative cash flow because they bought an asset that they didn’t sell in the same period.
The details matter, too. A business with positive cash flow, where operating cash flow is negative and cash is coming in from issuing debt might not be a good thing. Similarly, negative cash flow where operating is positive and high use of cash for retiring debt may be a good thing if their leverage is high, and they’re using cash flow to delever.
Literally what it sounds like. The flow of cash into and out of a business.
It’s important to understand your business’s cash flows because your business will make a lot of purchases and sales on credit with a promise to pay later rather than immediately. You need cash to pay expenses, and you need to know when you’ll be able to collect payment for your work.
In the simplest terms, It means the direction money is flowing in your business. There are specific definitions for revenue, gross profit, net profit…etc. but positive cash flow just means more money flowing into your company than is going out, and negative cash flow means money money is going out than coming in.
So, for instance, this year, I made one product that cost $100 dollars to produce, and I sold it for $50. My gross profit is $-50. But I also spent $25 advertising the product, so my net profit is $-75.
However, I also received a grant from the government this year for $100. My positive cash flow this year was $25. Although I am not profitable selling my products, I was able to maintain positive cashflow because of other sources.
The opposite could be true, where I made a net profit of $50, but had to repay a $100 loan, so my cashflow was $-50 this year.
A statement of cash in, schedule of cash out, and the ending balance. Usually by week, with actuals in the past and forecast in the future.
Cash flow is how money comes into a company over time. A big thing that finance departments have to deal with is that many costs are very regular, such as rent being due every month, but revenue comes in at a much more irregular pace. This means that you might have a bill due, but you don’t have the money *right now* to pay for it. Think about net payments, for example. Most suppliers allow for payment within 30 to 60 days. So let’s imagine that the auto glass company has net 60 payments, and they sell $10 million of auto glass to GM. If GM had to pay on delivery, the glass company would turn around and use the money to make more auto glass, which they could then sell. Since GM is paying on net 60 terms, the glass company is now stuck for 2 months having no inventory, and no money to replenish their inventory. There are ways around this, like PO financing and having long-term contracts, but the fact that money comes in inconsistently must still be dealt with.
Say you have a business that costs $12/year to run. At the end of the year you get a single $100 cash payment . So your profit is $88/year but each month you have to pay you employee $1 in cash.
So your business is very profitable but you have a cash flow problem. You will have lots of cash later but you need it now to pay your employee.
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