Is Your Business Actually Making Money? The Cash Flow Truth

Most people think that as long as there is money in the bank, their business is doing great. However, there is a secret to those numbers that even some seasoned owners miss. At its simplest level, cash flow is just the net amount of cash that goes in or out of a business. If more money comes into your bank accounts than leaves, you have got positive cash flow: if more money leaves than comes in, you have negative cash flow.

To really understand if your business is healthy, you need to look at the three specific types of cash flow that accountants track:

• Operating Cash Flow: This is the most important one for you to watch. It is the money coming from your customers minus all of the expenses and overhead required to produce that revenue. If this is a positive number, you have a healthy business.

• Financing Cash Flow: This tracks the money that comes in and out attributable to loans. This includes loan proceeds coming into the business or debt service, which are payments against loans going out of the business.

• Equity and Investing Cash Flow: These terms describe investors or shareholders putting money into the business. More commonly, it refers to shareholders taking draws or distributions out of a business.

The Bottom Line

You can have positive cash flow and still be in big trouble. How? You might have a lot of cash in the bank because you just took out a massive loan or put in your own personal savings, but if your operating cash flow isn’t positive, your business isn’t actually sustaining itself. While all three types of cash flow can produce a positive balance in the short term, only positive operating cash flow proves you have a functional, healthy company.