cash flow

Definition

Incomings and outgoings of cash, representing the trading (operating) activities of a firm. In accounting, cash flow is the difference in amount of cash available at the beginning of a period (opening balance) and the amount at the end of that period (closing balance). It is called 'positive' if the closing balance is higher than the opening balance, otherwise called 'negative.' Cash flow is increased by (1) selling more goods or services, (2) selling an asset, (3) reducing costs, (4) increasing the selling price, (5) collecting faster, (6) paying slower, (7) bringing in more equity, or (8) taking a loan. It is termed the 'life blood' of a firm—more firms (including the asset-rich ones) go out of business due to an anemic cash flow than for any other reason. However, the level of a firm's cash flow is not a good measure of its performance, and vice versa: high levels of cash flow do not necessarily mean high or even any profit; and high levels of profit do not automatically translate into high or even positive cash flow.