According to INVESTOPEDIA, cash flow refers to the movement of cash into or out of an account, a business or an investment.
When cash inflow exceeds outflow, this is generally considered to be a sign of good financial health both for individuals and companies. The source of cash flow is very essential to the survival of one’s business and personal finances.
Take for example an employer, who has ample cash on hand, such an employer can pay his employees, his creditors and himself on time, keeping the business afloat. The same goes for the employer, who needs enough cash in his bank account to pay for his house, his car and other personal expenses.
It is worthy to note that there are generally three types of cash flows which are; operational cash flows, investment cash flows and financing cash flows.
Let us take a brief look at each of these cash flows.
The operational cash flow refers to cash received or spent as a result of company business activities. For example, a confectionary business brings in cash by selling pastries and sends cash out to pay employees and suppliers. Similarly, the owner of the confectionery business pays himself a salary providing cash flow to a personal account, from which cash will flow out to pay for his expenses such as food, housing, family needs, vacation and others personal needs and wants.
The investment cash flow refers to cash received or spent through investments activities. It is the purchasing and selling of assets that will help grow the business. In the case of a business owners, investment cash flow through assets will help increase his/her net worth.
As for the financial cash flow, this is cash received through debt or paid out as debt repayments. For a company issuing stock, paying down debt and repurchasing shares will count as financial cash flow.
For a business or company, financial cash flow includes any cash coming from loans or other types of debts. If a company falls short of cash and is unable to pay up its obligations, such a company will experience a ‘cash flow crunch’ something this can lead to bankruptcy.