Cash Flow Definition

What Is Cash Flow?

The cash flow business definition is the flow of money going in and out of a business. 

How do you calculate a business’s cash flow?

Calculating a business’s cash flow for a certain period gives you important information about the business’s financial health. You can divide up the cash flow into money in and money out. You can subtract the total amount of money out (expenses) from the total amount of money in. This produces a positive or negative number. 

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It can also be helpful to break up money in and money out into separate categories. Let’s talk about those now. 

Money in (Revenue) 

It’s important for business owners to know who or what is putting money into their business. Categories include things like:

• In-person sales
• Online orders
• Loans
• Stock or share purchases
• Owner investment
• Accounts receivable

Keeping track of and checking in on the “money in” sources helps you focus your business efforts. For example, you could be certain that online sales are generating the most income. After all, you spend a lot of time fulfilling online orders, so you must be getting lots of online orders. You do your quarterly cash flow calculations. To your surprise, online orders are providing your business with the least amount of money in. Armed with this information, you can now focus your efforts on streamlining the online order process. You can then focus on more profitable areas.

Money out (Expenses)

Just like money in, knowing what your business is spending money on is key. Break up “money out” into subcategories gives yourself a deeper understanding of where the money is going. Here are some categories to get you started:

• Debts
• Bank charges
• Technology
• Marketing
• Equipment
• Manufacturing costs
• Shipping costs
• License fees

Now that you know what your business is spending its money on, you can use this to find out what’s providing the most returns. Going back to the previous example, you might be spending the most amount of money fulfilling online orders and maintaining your online store. Turns out, online orders aren’t as profitable as, say, in-person sales. You can then use this information to decide if you’d like to scale back your spending or boost it in other areas. 

Summary

Cash flow means the money flowing into and out of your business. Money in includes money from sales, owner investments, accounts receivable, or other categories. Money out are expenses such as manufacturing costs, shipping costs, license fees, and other charges. Calculating your cash flow helps you understand where your money is going and where it’s being well-spent. 

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