Cash flow is the movement of money in and out of a company, or an individual account. Cash flow can be positive, when there is more money coming in than going out, or negative, when there is more money being spent than earned.
A company’s cash flow is reflected in a financial statement called “cash flow statement.” The cash flow statement reveals the company’s profitability as well as liquidity. A company can be profitable, but not have enough cash on hand to tide it over in case of unforeseen problems or worse, just to finance its regular operating expenses. Problems in liquidity can lead to a company being declared insolvent and eventually going bankrupt.
A good cash flow is important for a company to keep tabs on its own liquidity and profitability. It is also important as a way to convince lenders and investors to give them more funding. Lenders and investors will of course give money only to companies that can prove their capability to build up the capital and repay loans. Without a good cash flow, a business will be hard-pressed to find outside funding.
Sometimes companies with cash flow problems pad their balance sheets to seem more profitable. Ways to pad cash flow statements include listing expenses as assets, overvaluing assets, and understating expenses. Such practices are considered unethical and can lead to charges of fraud.