When a company operates, there is cash flow. The expenditure and income combine to formulate the cash flow. When there is the income it is called inflow of cash and when there are expenditures, then it is called outflow of cash. The difference between both of these comes to be known as either positive cash flow and negative cash flow. The company has to take care of its cash and always remember “Cash is King” There are 2 types of cash flow:

Positive Cashflow

cash flow

If the flow of cash in your account in the form of sales, account receivables is more than the cash outflow from your account via accounts payable, salary to employees, monthly expenditures, etc. Then it indicates positive cash flow or cash inflow. This is a plus sign for the business as it tells that the business is flourishing and making more money than the expenditures.

Negative Cashflow

cash flow

But, here is a problem you need to take care of. If the business is having more outflows than inflows, then this shows negative cash flow. This problem is faced by a startup business, which just started operating and there might not be enough cash inflows to cover all the expenditure and outflows. Or it could also be faced by a seasonal business, which operates for a part of the year. In this case, with due diligence, the company can recover from negative cash flows and convert it into positives.

This brings us to the next question, what are the sources of cash flows (inflows and outflows both)?

What are the sources of cash flow?


cash flow


The cash received in exchange for goods and services comes under the category of inflow. The expenditures made to carry out an ordinary course of action such as rent, cost of goods sold, utilities, payroll, etc. comes under outflow.

Financing Activities

If a company gives out a loan to an individual or a group of people then it comes under the inflows of the firm. Whereas if a company has undertaken a loan, then interest and principal payments come under the outflow of the firm.

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Investment Activities

All the profits made by invested funds fall under the category of inflows. But if the company has purchased a fixed asset, gives a loan to other entities, or makes payment into investment vehicles is considered outflows. 

How the profits and cash flows are different?

It is not so easy as just visiting the profit and loss column of your balance sheet to determine cash flows. Remember, profit is an accounting term and cash flow needs to consider accounts receivable, inventory, accounts payable, capital expenditures, and taxation.

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There needs to be an in-depth view of these considerations as profit’s formula is simply revenue minus expenditures and cash flow includes all of the above.

Figuring out your breakeven point

It carries the utmost importance to know when your business will make profits. It will act as your target to reach in future transactions. Negative cash flow with negative profits will be a deadly combination, so try and maintain your cash flow while keeping an eye on making profits.

The process to calculate the breakeven point is as follows:

  1. Calculate the total sales made at the end of the month
  2. Add up all the purchases you made that you still need to pay for
  3. The difference is what you need to stay even.

False cash flow?

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Yes, even after meticulous calculations, cash flow is not always accurate. For this, check the balance sheet and income statements. For instance, let’s say your company sold some assets but that doesn’t mean your company is fairing great in the market. Even during liquidation, selling off assets takes place. Or it could be sold to pay off some debts.

Furthermore, what if the company is not reinvesting to maintain its cash flows? All of these indicate nothing but false cash flows.

How to solve cash flow problems

cash flow


Some tips to solve cash flow problems are

Short term financing

The credit card facility given by banks could be used to make emergency purchases or to decrease the gap between payables and receivables.

Long term financing

Use long term loans to purchase real estate and equipment instead of working capital of the firm. This disperses the payments throughout the average life of the asset. Despite paying interest on such loans, a businessman could use these assets as working capital or generate profits.

Quick recovery of receivables

A businessman should keep an eye on receivables. Though considered profits, these are not actual cash flow made to the firm. For this, an option of progressive invoicing should be used, where you can ask for a deposit and then fixed payments to be made in the future on certain dates.

The longer you wait to recover the receivables, the harder it will be to recover money in a long time. So keep in touch with the customer and even offer discounts for early payments. You can also add a payment link on your invoice so that the customer can use a credit card facility to make the payments, in case of a shortage of funds.

Cash tied up with assets

If you have an asset that has been obsolete or unused for a long time, consider selling it. An asset, not used takes up space and ties up with capital under your assets on the balance sheet. If a technology is not in use in the next 12 months, try selling it as well, as the current fast-changing world needs better and more upgraded technology. And it is possible that the value of the asset would be scrap in the market. You can keep it if the maintenance charges are low and the sale value of an asset is negligible.

Delaying payables

Finally, try and delay the payments to the vendors (if possible). Unless there is some benefit for you to make advance payments, try delaying the payments without spoiling your reputation in the market.

What are the practices to maintain cash flow?

cash flow

Consider business risks and be prepared in advance

You need to ask some questions like “what if a big order comes in?” or “what if a receivable isn’t realized?” and use this method to make a spreadsheet at first. And then, delete some cash inflows to get an idea about the situation that can arise in the future. This will be beneficial as a hypothetical problem is being solved using all tools available at the time.

A separate bank account for business

As the name suggests, make a separate bank account in the name of the firm and not under your personal account. This way all your purchases, credit card payments are made using that account. And the bank also issues, a monthly report of the total transaction made using an accounthatch that could be used to project and maintain cash flows.

Analyze inventory movement

This should be done to know which inventory is profitable and which isn’t that takes up a share from your working capital.

Keep buffer money at the disposal

It is advised to keep buffer money so that it could be used during some harsh times of business. According to the past workings of many flourishing companies, there was a rule to keep at least 3 months’ worth of buffer money in stock.

Better management of cash flow

Some businesses don’t invoice their customers, some procrastinate or some do it by the end of the month. So, it is important to invoice the customer at the time of the purchase to keep the management in check. Use a simple spreadsheet tool available in MS-office and even online


It is important to cut cash outflows in the business. A company needs to maintain a structure that not only focuses on profits but also on costs incurred.

Consider investing

Try investing in the accounts/deposits that generate big interests in the long run. Try going for penalty-free certificates or higher-paying accounts.

Focus on cash flow instead of profits

This is a critical one to grasp. A lot of businesses focus on profits but ignore cash flow, which might fail in the long run. For this, keep all your attention towards maintaining positive cash flow as it has profits included in it. Meet clients that promise cash flow, even if it means having slimmer/smaller profit margins.


The final verdict remains the same, the cash flow of a firm needs to be managed for its survival. The stockpile of cash a company determines the strength of business and profit does not always realize something fruitful in nature. Keeping that in mind, you are good to go.


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