Part 3: What Is Cash Flow?

Cash flow is the movement of money into and out of your business. Unlike profit, which is based on accounting rules, cash flow shows how much actual money you have available at any given time.

In short:
📥 Money in = sales, payments, loans
📤 Money out = bills, wages, purchases, taxes

💧 Types of Cash Flow

1. Operating Cash Flow

The money your business generates through core operations — like selling goods or services.

Example: Payment received from a customer, minus staff wages and rent.

2. Investing Cash Flow

Money used to buy or sell long-term assets, like equipment or vehicles.

Example: Buying a new van or selling old IT hardware.

3. Financing Cash Flow

Money related to loans, investors, or withdrawals by owners.

Example: Repaying a business loan or drawing owner dividends.

📉 Positive vs Negative Cash Flow

• ✅ Positive: More money comes in than goes out — you can pay bills and invest.

• ❌ Negative: You're spending more than you're earning — leading to delays, debt, or even closure.

🔍 Why Cash Flow Matters

• It keeps the lights on.

• You can be profitable on paper but still bankrupt if your cash is tied up in unpaid invoices.

• Strong cash flow is vital for paying tax, staff, suppliers, and growing your business.

📌 Real-World Example: Late Payments, Big Problems

Let’s say you invoice a client £15,000. Your accounts show this as “income.”
But if that client doesn’t pay for 90 days, you still need to cover:

• Staff wages

• Rent

• Materials

➡️ Without available cash, you’re in trouble — even though your books say you’re profitable.

🧰 Sources of Cash Inflow

• Customer payments

• Loans or credit lines

• Asset sales

• Investment or capital injections

🛠️ Common Cash Outflows

• Payroll

• Utilities

• Taxes (VAT, PAYE, Corporation Tax)

• Equipment purchases

• Stock and materials

• Premises costs

✅ What Healthy Cash Flow Looks Like

• You always know your bank balance

• You chase invoices promptly

• You forecast upcoming bills and taxes

• You plan for seasonality and slow months

• You never panic when an expense lands

💡 Tip: Strong cash flow doesn’t mean high profits — it means control. We’ll now explore exactly how cash flow and profit differ, and why you must measure both.