What cash flow means to your business
An Income Statement may show a profit but what's even more important is positive cash flow. Aren't they the same? No.
An easy way of understanding the difference between a net profit on your Income Statement and positive cash flow can be described this way. Let's say you have a retail store selling clothes. If you sell every stitch of clothing off the racks, what do you do next? At that very moment (assuming you are selling your inventory at a level high enough to more than cover all your bills), you have positive cash flow. Do you plan to continue to be in business? If so, you need to order more inventory to sell. That process is done over and over. What happens when you get to the end of the year and you have put all your profits back into inventory and perhaps paid down some old business debt? Well, you have negative cash flow for the period.
Just keep in mind that cash flow trumps all. If you don't have positive cash flow, you run the risk of not being able to meet your obligations as they become due and could find yourself out of business (even if you show a profit on your Income Statement).
I am a CPA in San Antonio and provide bookkeeping, payroll, taxes and more. We offer a free initial visit and look forward to serving your business needs.
Richard J. Garcia | 07/13/2012