04: Understanding cash flow

A positive cash flow is crucial to the continuing success and existence of any company. Companies become insolvent when they run out of cash to pay bills and cash flow is the best indicator of both viability and liquidity.

The cash flow statement shows what has happened to the cash position of your company over the accounting period, and includes money in the bank. It can be prepared by adjusting the profit and loss statement for non-cash items such as depreciation. The statement can look complicated but it will carry a simple message, namely whether your business is generating cash or using it up.

A mature, profitable business will usually generate cash and a younger ambitious business may use up cash even if it is profitable.