Solvency

Cash flow is the movement of money in and out of the business.

Cash flows out of the business when bills are paid

• Cash flows into the business as receipts, eg from cash received from selling products or from loans.
• Cash flows out of the business as payments, eg to pay wages, supplies and interest on loans.
• Net cash flow is the difference between money in and money out.

Profit and cash flow are two very different things. Cash flow is simply about money coming and going from the business. The challenge for managers is to make sure there is always enough cash to pay expenses when they are due, as running out of cash threatens the survival of the business.

Insolvency

If a business runs out of cash and cannot pay its suppliers or workers it is insolvent. The owners must raise extra finance or cease trading. This is why planning ahead and drawing up a cash flow forecast is so important, as it identifies when the firm might need an overdraft.