Cash flow represents the actual movement of money into and out of a business over a specific period, separate from profitability on paper.
Cash flow tracks the actual money entering and leaving a business. It records when cash is received from customers, paid to suppliers, spent on salaries, used for investment and distributed to lenders or shareholders. Unlike profit, it does not include amounts owed but not yet paid.
Cash flow is the story of what actually happened with money. A business can show profit on paper while running out of cash to pay people. Cash flow shows whether the money in the bank is going up or down.
Imagine a business that sells ₹10 lakh of products in January but allows the customer to pay in April. The business records ₹10 lakh of revenue in January, but the cash does not arrive until April. Expenses are paid every month regardless.
Operating cash flow: customer receipts ₹80 lakh minus supplier payments ₹40 lakh, salaries ₹15 lakh, and other expenses ₹10 lakh equals ₹15 lakh. Investing cash flow: equipment purchase ₹5 lakh. Financing cash flow: loan repayment ₹3 lakh. Net cash flow: ₹7 lakh.
The difference between profit and cash flow creates the most common surprises in business. Expanding too quickly, slow collections, large inventory builds, seasonal patterns, tax payments and capital expenditure can all create cash flow pressure even when the business is profitable.
Cash flow forecasting should precede every growth decision. Understanding the timing of cash inflows and outflows, the impact of seasonality, and the cash required to support different growth scenarios allows better decisions about credit terms, inventory, staffing and investment.