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Written by Eric Quick
on April 19, 2021

Cash flow is the lifeblood of any company, but what exactly is it? You've heard different terms thrown around but let us what you through the basics. 

 

Cash Flow Fundamentals

 

Revenue

Revenue is the total amount of income or sales from selling goods or services in a specific time frame. Keep in mind that just because you have generated revenue doesn’t mean you have collected the cash from that transaction. It’s all hypothetical until the money hits your bank. 

 

Profit

Profit is the financial gain made through business activity.

  • Gross Profit = Sales - Cost of Goods Sold (Specific to just the sale)
  • Bottom Line Profit = Sales - Cost of Goods Sold - Overhead/Administrative Costs (Overall profit from month)

 

Cash Flow

Cash flow is the movement of cash that goes in and out of your business during a specific period of time. Cash flows include the money you have paid out to your vendors and creditors, as well as the money you have brought in from customers during that same time frame. Depending on your business’s size and how much money you have coming and in out, you should monitor your cash flow on a weekly or monthly basis. 

Revenue profit cash flow

Net Cash Flow

Net cash flow is what's leftover after you have collected the cash from your sales and have paid for your expenses. Positive cash flow occurs when there’s more money coming in at any given time, while negative cash flow means there is more money going out.

Let’s say you have collected $7,000 in sales this month and have $5,000 worth of expenses. The $2,000 leftover is the positive cash flow that you can reinvest in your business.

On the contrary, if you had collected $5,000 in sales with $7,000 worth of expenses, you would have a negative cash flow of $2,000. This is often called a burn rate of $2,000.

In this case, you will need cash reserves to cover the difference, have a line of credit, borrow money from financial institutions or have equity proceeds to finance your business until you become cash flow positive.

 

net cash flow

Why Is Cash Flow Important?

Cash flow is critical because the healthier your cash flow is, the more you can grow your business. You can hire additional headcount to increase sales or invest in technologies to make your company more efficient. It’s important to note that a company can have a profit with a negative cash flow. Similarly, a company can have a positive cash flow but fail to make a profit. It all comes down to how quickly you collect the money owed to you vs. how soon you need to pay your expenses and overhead.

 

Key Takeaways

  • Cash flows are the amount and timing of cash that comes in and out of your business.
  • Strong collected profits from your goods and services help improve cash flow.
  • Revenue is vanity, Profit is Sanity, Cash is King/Queen
 
Congratulations, you are one step closer to becoming a financial whiz. 

Learn how you can save 200 hours per year by automating your cash flow

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