What is Cash Flow? Definition, Types, Estimation, FAQs.

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What is Cash Flow?

Cash flow refers to the movement of cash in and out of a business or a company in a given period of time. There are two types of Cash flows – Positive Cash Flow and Negative Cash Flow. 

If the amount of cash coming out of the business at the end of a month is more than the cash put in at the beginning of the month, it is a positive cash flow. For example, if you put $5000 in your business at the beginning of your month and you get $8000 at the end of the month, you have a positive cash flow of $3000. 

On the other hand, if the amount of cash coming out of the business at the end of a month is less than the cash put in at the beginning of the month, it is a negative cash flow. For example, if you put $5000 in your business at the beginning of your month and you get $2000 at the end of the month, you have a negative cash flow of $3000. 

Remember one very important thing: Cash Flow is not the same as profitability. A profitable business can still run out of cash if they don’t manage their expenditures properly. 

How to predict Cash Flow?

Just like you are aware of the cash flow your business generates from month-to-month, you should be aware of the cash flow estimated for the next year. 

In order to do this, you will need to list down all your expected costs, which includes on-off purchases like office equipment and training as well as recurring costs like rents. Then, you can calculate the estimated earnings from sales for each month.

Make sure you know how long it takes for customers to pay you and if you have any customers who delay, how long that is going to take. Once your cash flow is estimated, you can simply put the numbers together and see if your cash balance goes higher or lower. 

What are the advantages of Forecasting Cash Flow?

The main advantage of Cash flow is that it allows you to spend wisely and reduce risk of going bankrupt. 

Estimating cash flow enables you to identify areas that will benefit from lower budgeting and look for areas or opportunities where you can use your saved-up resources. 

Forecasting cash flow is especially beneficial for seasonal businesses like vacation rentals, winter clothing sales, etc, who survive being in demand and capturing market only for a limited time in a year. 

FAQs

Q: What are the two types of cash flows? 

A: There are two types of Cash flows – Positive Cash flow and negative Cash Flow. If the amount of cash coming out of the business at the end of a month is more than the cash put in at the beginning of the month, it is a positive cash flow. For example, if you put $5000 in your business at the beginning of your month and you get $8000 at the end of the month, you have a positive cash flow of $2000. 

Q: What are the benefits of predicting cash flow? 

A: Estimating cash flow enables you to identify areas that will benefit from lower budgeting and look for areas or opportunities where you can use your saved-up resources.It allows you to spend wisely. It is especially beneficial for seasonal businesses like vacation rentals, winter clothing sales, etc, who capture markets only for a limited time in a year. 

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