Cash Flow
Cash flow is the movement of cash into and out of a business over a stated period.
What is Cash Flow?
Cash inflows increase the cash available to the business; outflows reduce it. Net cash flow is the difference between the two for the selected period. It is a movement, whereas the cash balance is the amount held at a particular moment.
For ecommerce operators, customer settlements, supplier payments, advertising bills and refunds all have cash timing. An order being placed or revenue being recognized does not necessarily mean the corresponding funds have reached the bank.
Net cash flow = Cash inflows − Cash outflows
For a simple cash bridge: closing cash = opening cash + net cash flow. Formal statements may separately reconcile exchange-rate effects and use cash and cash equivalents.
Profit does not pay this month’s inventory deposit
A store begins with $20,000 of cash. During the month it receives $30,000 and pays out $38,000, including an inventory deposit. Net cash flow is −$8,000 and closing cash is $12,000. The cash bridge alone does not tell us the month’s profit because the payments can include assets and timing differences.
How to interpret it
Cash flow statements distinguish operating, investing and financing activities. Customer collections and ordinary supplier payments typically relate to operations; equipment purchases are investing; borrowing and loan principal repayments are financing. The categories explain why cash changed.
A positive total can conceal weak operations. A loan increases cash even if the store’s trading activity consumes it. Likewise, buying equipment may make total cash flow negative during an otherwise healthy operating period. The source of the movement matters.
Profit and cash differ because recognition and payment do not always happen together. Unsold inventory purchases can use cash before the goods enter COGS. Depreciation reduces accounting profit without being a new cash payment in that period.
The date within the period matters too. A store can end the month with enough cash and still face a shortfall when a supplier is due before a settlement arrives. A period total summarizes movement; a dated cash forecast shows whether obligations can be met along the way.
Common mistakes
Calling a loan receipt revenue
Borrowing creates cash and a repayment obligation. It is not a sale or operating profit.
Using net profit as the bank movement
Inventory, receivables, payables, financing and non-cash expenses can separate the two. Reconcile the difference rather than expecting the figures to match.
Definition reference: SEC guide to financial statements.