What is cash flow and why is it important?

Cash flow refers to the movement of money into and out of a business, encompassing all cash transactions during a specific period. This definition captures not only the inflow of cash from various sources such as sales and financing but also the outflow due to expenses, investments, and liabilities. Cash flow is crucial for the operational sustainability of a business because it ensures that the company has enough liquidity to meet its short-term obligations, such as paying suppliers, employees, and other operational costs.

Without positive cash flow, a business may struggle to maintain its day-to-day operations or invest in growth opportunities. While other financial metrics, such as revenue and profit, are important, they do not provide a full picture of a company's financial health, particularly regarding its ability to manage cash effectively. Therefore, understanding and monitoring cash flow is essential for strategic decision-making and ensuring the long-term viability of a business. There is no question that cash flow is a fundamental concept that underlies critical aspects of financial management and planning in any organization.