Cash flow is the money that is moving (flowing) in and out of your business in a month. Here is how cash flow works:
- Cash is coming in from customers or clients who are buying your products or services. If customers don't pay at time of purchase, some of your cash flow is coming from collections of accounts receivable.
- Cash is going out of your business in the form of payments for expenses, like rent or a mortgage, in monthly loan payments, and in payments for taxes and other accounts payable.
Think of 'cash flow' as a picture of your checking account. If more money is coming in than is going out, you are in a "positive cash flow" situation and you have enough to pay your bills. If more cash is going out than coming in, you are in danger of being overdrawn, and you will need to find money to cover your overdrafts. This is why new businesses typically need working capital, in the form of a loan or line of credit, to cover shortages in cash flow.