What is cash flow? The meaning for a small business, with a worked month

Short answer: cash flow is the money moving into and out of your business bank accounts over a period, such as a month. Money in (customer payments, card takings, a loan paid in, an asset sold) minus money out (suppliers, wages, rent, tax, loan repayments, equipment, what the owner takes) is your net cash flow, and it is exactly how much the bank balance went up or down. Positive cash flow means more came in than went out, so the balance rose; negative cash flow means it fell. Cash flow is not the same as profit: profit counts a sale when you invoice it and leaves out loans, equipment and drawings, so a business can make a profit in a month and still have less money at the end of it.

Cash flow in one sum

For any period:

Opening bank balance + cash in − cash out = closing bank balance

So net cash flow = cash in − cash out = closing balance − opening balance. If you had 42,000 in the bank on 1 March and 36,000 on 31 March, your net cash flow for March was −6,000, whatever the profit and loss says. The net cash flow calculator does this sum on your own figures.

The three kinds of cash flow

A cash flow statement splits the money in and out into three groups, because each one tells you something different:

Kind	What is in it	What it tells you
Operating (trading)	Customer payments, card takings, supplier bills, wages, rent, GST or VAT, income tax	Whether the day-to-day business makes cash. This is the one that has to be positive over a normal year.
Investing (assets)	Buying or selling vehicles, machines, computers, another business	How much cash went into (or came out of) things the business keeps.
Financing (loans and owners)	Loans paid in, loan repayments, money the owner puts in, drawings, dividends	How the business is funded and what the owners take out.

The cash inflow and outflow examples list what goes in each group, and the cash flow statement example shows a full year laid out this way.

A worked month: profit of 17,000, cash down 6,000

A joinery business in Christchurch, New Zealand, starts March with 42,000 in the bank. During the month:

Money in	Amount
Customers paying invoices	61,500
Old ute sold	9,000
Total in	70,500

Money out	Amount
Suppliers (timber, hardware)	24,800
Wages and PAYE	21,600
Workshop rent	3,500
GST paid to Inland Revenue	7,200
Loan repayment (the principal part)	2,400
New panel saw	11,000
Owner’s drawings	6,000
Total out	76,500

Net cash flow is 70,500 − 76,500 = −6,000, and the bank ends March at 36,000. Split into the three kinds:

Kind	In	Out	Net
Operating	61,500	57,100 (suppliers, wages, rent, GST)	+4,400
Investing	9,000	11,000	−2,000
Financing	0	8,400 (loan principal, drawings)	−8,400
Total			−6,000

Over the same month the profit and loss shows a net profit of 17,000. The owner sees a profit and a lower bank balance, and both are right:

• Trading made 4,400 of cash, not 17,000. March invoices came to 78,200 including GST, but customers paid 61,500, so the business is owed 16,700 more than at the start of the month. That is partly offset by supplier bills not yet paid and by depreciation, which is a cost in the profit but not a payment.
• The saw, the ute, the loan principal and the drawings moved 10,400 of cash out in total, and none of them is in the profit (the saw shows up only slowly, as depreciation).

Nothing here is wrong with the business. Trading is cash positive, the saw was a one-off and the ute sale paid for most of it. The thing to watch is the 16,700 of new money owed by customers: if it is not collected in April, the next month looks worse. Profit but no cash walks through the gap between the two numbers step by step.

Positive and negative cash flow

Positive cash flow means more money came in than went out over the period. It is the normal state for a healthy trading business over a year, but one positive month can come from a loan being paid in or an asset being sold, so look at where it came from: positive operating cash flow is the kind that lasts.

Negative cash flow means the bank balance fell. It is not always bad:

• Fine: buying equipment from savings, paying an annual tax bill, a seasonal quiet month you planned for, paying down a loan early.
• A warning: operating cash flow negative for two or three months in a row, the balance falling while profit holds up, or the overdraft being used more and cleared less. Those are among the early signs of a cash flow problem.

What matters most is how long the cash lasts at the current rate. If the bank balance is falling by 6,000 a month, 36,000 is six months; the cash runway calculator works that out with your own figures.

Cash flow vs profit

	Profit	Cash flow
A sale counts	When you invoice it	When the customer pays
A bill counts	When the bill is dated	When you pay it
Loans paid in and repayments of principal	Not included	Included
Equipment and vehicles	Spread over years as depreciation	The full price, when you pay
GST or VAT	Not included	Included, when collected and when paid
Owner’s drawings and dividends	Not included	Included
Answers	Is the business making money?	Can it pay its bills, and when?

You need both. Profit says whether the work is worth doing; cash flow says whether you can keep doing it. A growing business can make more profit every month and still run short of cash, because it pays for wages and materials before customers pay it.

Where to see your cash flow in Xero

• Statement of Cash Flows (Reports): money in and out for any period, split into operating, investing and financing like the table above. The Xero Statement of Cash Flows guide shows how to run and read it.
• Bank Summary (Reports): opening balance, cash received, cash spent and closing balance for each bank account. The quickest way to see the month’s net cash flow.
• Cash in and out on the Xero dashboard (homepage): the last six months of money in and out by month. See the Xero dashboard explained, and cash flow chart to chart a full 12 months.
• Short-term cash flow: what Xero expects in the bank over the next 30 days from bills and invoices due. See Xero short-term cash flow.

These reports only include what has been reconciled, so reconcile the bank first. To look further ahead than 30 days, the 12-month cash flow forecast template shows the balance month by month and the lowest point.

Common questions

What is cash flow in simple terms? The money coming into and going out of your business bank accounts over a period. Money in minus money out is your net cash flow, and it equals the change in your bank balance over the same period.

What is an example of cash flow? A business starts the month with 42,000 in the bank, receives 70,500 (customer payments and an old vehicle sold) and pays out 76,500 (suppliers, wages, rent, GST, a loan repayment, a new machine and the owner’s drawings). Its net cash flow is −6,000 and it ends the month with 36,000.

What is positive cash flow? More money coming in than going out over a period, so the bank balance rises. Positive cash flow from trading (customers paying more than the running costs) is the healthy kind; a loan or an asset sale also makes a month positive but cannot be repeated for ever.

Is negative cash flow bad? Not always. Buying equipment, paying a yearly tax bill or a planned quiet month all make cash flow negative for a while. It is a warning when trading cash flow is negative for several months in a row, or when the bank balance keeps falling while profit holds up.

Is cash flow the same as profit? No. Profit counts sales and bills when they are invoiced and leaves out loans, equipment, GST or VAT and drawings. Cash flow counts money only when it actually moves. A profitable business can have negative cash flow, and a loss-making one can have a positive month.

What are the three types of cash flow? Operating (day-to-day trading: customers, suppliers, wages, rent, tax), investing (buying and selling assets such as vehicles and equipment) and financing (loans, repayments, money the owners put in or take out).

See your cash flow every Monday

ReportPilot reads your Xero figures and sends a short plain-English email every Monday: cash in the bank and how it has moved since last month end, how sales and net profit compare with last month, who owes you and how much is overdue, and bills due soon. Its dashboard shows 24 months of sales, profit, cash and money owed to you by month, so a month like the joinery business’s March stands out. It asks Xero for read-only access, so it can read your accounts but never change them, and there is a 14-day free trial with no card.