Cash flow is an important part of business operations and success. However, if you are new to business, it can be difficult to understand cash flow and how it relates to tracking your company’s financial health. When you understand cash flow, you can use it to ensure that you are meeting your business goals from month-to-month as well as for the long-term goals set for your organization.
Cash Flow Basics
Cash flow refers to the amount of money coming into and going out of your business. The components of cash flow are inflow, which is the money coming in, and outflow, which is the money used to pay expenses. If your business is cash flow positive, it means you have enough inflow to meet your financial obligations. If your business is cash flow negative, it means your outflow exceeds your inflow, so you do not have enough to meet your financial obligations.
An Explanation of Cash Flow Statements
A cash flow statement is a way to look at your company’s financial health. It combines information from a profit and loss statement with information from a balance sheet to provide insight about day-to-day operations, investments, and financial activities. It is useful to help identify patterns of the flow of cash in regard to your business.
Short-Term Liquidity and Long-Term Solvency
Though they often appear together in discussions about business, liquidity and solvency are two different ideas. Liquidity is your business’s ability to pay bills on a short-term basis. Solvency, on the other hand, examines your ability to keep the business operational on a long-term basis. Most cash flow statements focus on liquidity. Solvency is typically examined in the context of equity and debt levels.
Whether you are new to business or just want a deeper understanding of the financial health of your company, understanding cash flow is a good place to start. When you understand how finances in organization work, you can use the information to keep track of your business finances, develop effective strategies, and achieve your business goals.