What Is Cash Flow?
A profitable business can still run out of cash. Understanding cash flow is survival knowledge for every founder.
Key Takeaways
- Cash flow is the movement of money in and out of your business over a period of time.
- Profit and cash flow are not the same — you can be profitable and cash-flow negative.
- Most small business failures are cash flow failures, not profitability failures.
Cash flow vs profit
Profit is a calculation: revenue minus costs on paper. Cash flow is physical: the actual money moving in and out of your bank account. The gap between the two is where businesses get into trouble. You might show £50,000 profit this month while having £10,000 in the bank because customers haven't paid yet and you've already paid your suppliers.
Operating, investing, and financing cash flow
Operating cash flow comes from your core business activities — sales received minus costs paid. Investing cash flow relates to buying or selling assets (equipment, property). Financing cash flow relates to loans, investor capital, and dividends. For most SMEs, operating cash flow is the number to watch most closely.
The timing problem
The most common cash flow killer is timing mismatch: you pay suppliers in 30 days but your customers pay you in 60 or 90 days. Or you import stock in January but sell it at Easter. The business is profitable in theory, but the cash is not there when bills are due. This is why forecasting cash flow — not just profit — is essential.
How to manage it
Invoice promptly. Chase late payments. Negotiate longer payment terms with suppliers. Use stock financing or invoice discounting for larger gaps. Maintain a cash buffer of at least two to three months of operating costs. AskBiz tracks your cash position and flags weeks where outflows are projected to exceed inflows.