Cash Flow

The flow of cash through an organization is sometimes compared with the flow of blood through the body. Cash is in continuous circulation through the arteries of the business carrying value to its various organs. If this flow is stopped, or even severely reduced for a time, then serious consequences result.

However, a company can run out of cash even if it is currently generating good profits.

The biggest threat of a cash deficit is that the management of the company may lose its autonomy. An outside agency, such as an unpaid creditor or a bank whose loan is in default, could decide the fate of the company. That fate could be a forced reconstruction or even an involuntary takeover.

The main cash inflows come from sales, that is the payment received from customers in lieu of the goods and services provided by company. This is supplemented by the unused short-term loan facilities, long-term loans and infusion of equity by the promoters.

The main cash out-flows take place in the form of payments to suppliers of raw materials and services, staff salaries/wages, payments of all other operating expenses, interest, tax and dividends, loan repayments and capital expenditure.

The non-operating cash inflows include new equity capital, new long-term loans and sale of fixed assets. The cash flows summary tells a very important part of the story of a business. But, cash flows do not tell the whole story. Business managers, investors in business, business lenders, and many others need to know two other essential things about a business that are not reported in its cash flow summary: the profit earned (or loss suffered) by the business for the period; the financial condition of the business at the end of the period.