When you run a business, it is important to know about cash flow so you can manage the finances of your organization effectively. Cash flow is, quite simply, the amount of cash (or cash equivalent) a company gets or sends out through payments. Cash flow analysis is used to determine a company’s liquidity position through a snapshot of the how cash moves in and out of the business. Cash flow can be either positive or negative, based on the amount going in or out. This is calculated by subtracting the opening balance (cash balance at the beginning of a period) from the closing balance (cash balance at the end of a period). If that total is positive, the company’s cash flow is positive. If that total is negative, the company’s cash flow is negative.
Cash flow statements are used to help determine a company’s cash flow, which shows how money is being used. The categories of a cash flow statement can highlight areas in which changes need to be made, if a cash flow is negative, so a company can achieve its financial goals. However, cash flow is not the best metric to use when trying to determine whether an investment should be made. The balance sheet and income statements should be integral parts of the analysis.
It should also be remembered that cash flow may increase based on the acquisition of assets rather than an influx of revenue. Assets are not included in a company’s liquidity. Selling off assets to pay debts is not a positive sign for the company and should be investigated. In addition, if the organization is not reinvesting cash, it means that the business is not diversifying or building for expansion appropriately. Paying attention to your company’s cash flow can help you manage your company’s finances more effectively so you can achieve business goals and objectives.