Inflows and outflows of cash and cash equivalents. Also called payments of cash and receipts of cash or cash payments and cash receipts.
Cash payments (cash outflows) are among others payments to trade creditors, employees (net salary), governments (corporate tax, social securities, VAT or sales tax and/or labor tax withholdings), owners (dividends and repayments of (equity) contributions) and financial institutions (interest and principal).
Cash receipts (cash inflows) are among others receipts from customers, governments (grants or subsidies), owners ((equity) contributions) and financial institutions (withdrawals from time-deposits and interest).
Is this important?
That cash (and cash equivalents) matters makes sense: CASH IS KING is not just a saying…… or may be…..
Maintaining a positive cash flow is the number one rule of thumb in business. It’s the net amount of money flowing into and out of your bank account on a daily basis and is crucial to keep healthy.
Positive cash flows
This indicates that your cash is increasing. It means you can reinvest in your business to hire more staff, acquire new stock, and make improvements to premises. It means you can settle debts, return money to shareholders, pay expenses, and most importantly future-proof against any unforeseen financial pitfalls.
Cash flow is used to assess the quality of a company’s income. For example, how liquid it is. This could indicate whether it can remain solvent.
Negative cash flows
A negative cash flow indicates that your liquid assets are decreasing. It’s an urgent warning that costs need to be reduced to stay afloat. This is where small businesses that are forecasting their financial future have a big advantage.
Knowing what payments are flowing into and out of your business accounts allows you to manage your business better. It can help to buffer small margins, as the owner will know in advance how much cash they need to pull in each period.