This is the first installment in our “Cash Flow 101” series—our ultimate guide to help you understand and manage your business’s cash flow, and prevent future cash flow problems. 

Maybe you remember studying cash flow for a semester or two, many moons ago, and you’re a bit hazy on the details. Maybe your business has always been flush with cash, and you’ve never given the concept a second thought.

Or, maybe you’ve never even heard the words “cash flow” put together before.

What is cash flow?

Whatever your experience with cash flow may be, here’s a quick definition:

Cash flow refers to the revenues a business generates (and collects) compared to expenses it pays out over a fixed period of time.

Broadly speaking, businesses bring in money through sales, financing, and returns on investments, and they spend money on supplies and services, as well as utilities, taxes, and other bills.

Being cash flow positive means that you’re bringing in more money than you are spending, and your business is in good shape. Being cash flow negative means—you guessed it—that you are spending more than you have coming in, and you’re headed for trouble.

Unfortunately, business owners can’t predict the future—particularly when it comes to any unforeseen expenses they might incur (e.g., a truck breaking down prematurely and needing replacement, or a data breach resulting in a forced increase in IT spend). And they also can’t know for certain that their clients will pay their bills on time.

Together, these uncontrollable variables lead to a rather logical conclusion: Cash flow problems affect many businesses.

According to a recent survey, three out of every five businesses experience problems with cash flow. Still, while cash flow problems are not uncommon, business owners are better off doing whatever they can to avoid them altogether.

The benefits of positive cash flow

Back to the basics: Positive cash flow is defined as ending up with more liquid money on hand at the end of a given period of time compared to what was available when that period began.

Businesses that master cash flow management can:

  •  Pay their bills. Positive cash flow ensures employees get checks each payroll cycle. It also gives decision makers the funds they need to pay suppliers, creditors, and the government.
  •  Invest in new opportunities. Today’s business world moves quickly. When cash is readily available, business owners can invest in opportunities that may arise at any given point in time.
  •  Stomach the unpredictable.  Having access to cash means that whenever equipment breaks, clients don’t pay their invoices on time, or new government regulations come into effect, businesses can survive.

There’s negative cash flow, too

Of course, life doesn’t always work out the way we want it to. So even when decision makers do their due diligence, cash flow problems may still arise from time to time—that’s just how it is.

Negative cash flow is defined as not having enough cash on hand to pay immediate outstanding obligations. When cash flow is negative, businesses may struggle to pay their bills, might not be agile enough to respond to new opportunities, and can have a hard time figuring out how to cover expenses they haven’t budgeted for.

Read next:

Cash Flow 101: How to Identify and Fix Cash Flow Problems 

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