What is cash flow?
The cash actually flowing into and out of a business over a given period.
In detail
Profit is recorded when business activity occurs, and the money may not have arrived yet; cash flow looks at how much money actually comes in and goes out. A company can be profitable on paper yet have no cash to pay wages and suppliers because receivables are not collected and too much is tied up in inventory.
For example
This month goods worth RMB 1 million are sold, but the customer pays only after 60 days, while the supplier requires payment within 30 days. The books show a profit, but cash in hand may be short.
How companies use it
Make cash flow forecasts regularly to see whether there is a funding gap in the coming months. Speeding up collections, controlling inventory and negotiating longer payment terms with suppliers can all improve cash flow.
Common misconceptions
Looking only at the income statement. Many companies do not fail because of losses, but because cash flow breaks down.
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