What Does Cash Flow Positive Mean and Why Is It Important? (2024)

Cash flow provides a better understanding of a firm’s liquidity, flexibility, and overall financial health. Business activities generally involve cash inflow via income from sales revenues and cash outflow via fixed and variable expenses. For a business to be cash flow positive, its cash inflow should exceed the cash outflow. Positive cash flow is essential for any business to survive, prosper, and sustain long-term growth.

Cash flow positive: What is it?

Cash flow positive simply means more cash coming in than going out. This metric indicates that a business has enough working capital to cover all its bills and will not need additional funding.

What Does Cash Flow Positive Mean and Why Is It Important? (1)

Additionally, a consistently positive cash flow infers that the business can add to its assets and create value for its shareholders.

The reasons why positive cash flow is vital for a business, are:

  • Helps make better decisions for the future: Knowing the exact amount of money going in and out of the company allows its management to make decisions based on accurate information. Being cash flow positive provides the platform to make significant purchases for the company's future.
  • Helps in taking expansion decisions: Business expansion can be risky, as it involves spending large amounts of cash required to grow a business. Effective cash flow management indicating a positive cash flow can help an organisation's leaders determine the most appropriate time for expansion.
  • Helps maintain good business relationships with third parties: Being cash flow positive can avert awkward situations where there aren't enough funds available to pay suppliers, contractors, or other third parties and help maintain a good relationship with them.

What Does Cash Flow Positive Mean and Why Is It Important? (2)

How do you make your business cash flow positive?

To become cash flow positive, liquid assets or cash generated from the company's operating activities must exceed the money spent to keep it running. If your business is struggling with cash flow, here are a few measures to make your business cash flow positive:

  • Maintaining a buffer fund: The first pillar of positive cash flow is always to be prepared for the worst. That’s why it’s essential to have some buffer cash on hand. Most accountants usually advise a minimum of one month’s operating expenses as an available cushion or at least have enough money to cover the next payroll period.
  • Improving your receivables: Outstanding invoices and delayed client payments are the biggest cash flow hurdles, especially for small businesses. Measures can be taken to improve cash collection by encouraging clients to pay on time (follow-up and execute late penalties on invoices) and being proactive about payment collection (setting up online payments and auto-pay functions).
  • Managing your payables: You can negotiate your accounts payable with vendors. Restructuring your payments to vendors creates a more balanced income for your business. Also, cut unnecessary expenses that do not add value to your business.
  • Paying taxes regularly: Evade a windfall of expenses by assessing and regularly paying off estimated income taxes to the state and federal authorities every quarter.
  • Reviewing business operations: Several business operations can be reevaluated and updated for efficiency. Identifying processes that can be outsourced helps in substantial cost-cutting. Apart from outsourcing, you should continuously monitor, evaluate, and improve other areas of operation to determine efficiency gaps to enhance savings.
  • Managing inventory effectively: Effective inventory management is critical to improving cash flow. Particularly for a small business, inventory is equivalent to cash; the business owner should adjust inventory as needed and turn inventory quickly.
  • Reviewing finance/loan options: Various options available for financing to obtain extra funds should be carefully evaluated. Options, such as loans from banks/non-banks, invoice financing, invoice factoring or business line of credit, must be weighed carefully before you finally zero down.

Does positive cash flow imply that the business is profitable?

Cash flow positive vs profitable: Cash flow is the cash a company receives and pays, but profit is the total revenue after disbursing all business expenses. Although being cash flow positive in most situations implies that the company is incurring profits, the two aren't the same.

Sometimes, a business can be cash-flow positive but may not be profitable For instance, if a business operates at a net loss, borrowing cash helps create a positive cash flow. Similarly, when it sells a significant asset to raise capital, the money it receives is an inflow of cash. In both cases, the business is cash flow positive but not profitable.

Similarly, in the case of a start-up business, a positive cash flow doesn't necessarily prove that the company is profitable. The liquidity could result from factors other than profit (loan funds or stocks sold at a loss, etc.).

  • Cash flow positive vs break-even: The break-even point is when the business's profit equals zero, and cash flow is neither positive nor negative. At this point, the total cash outflow equals the business's cash inflow.
  • Cash flow positive vs negative: Cash flow is deemed negative when a business has more cash outgoing than the money coming in. In a cash flow negative situation, a company cannot cover its expenses from its sales alone. Instead, it requires funds from assets and financing to bridge the difference.

Key takeaways

Being cash flow positive implies that the business is liquid or solvent.Businesses should ensure that their revenues exceed expenses, creating a positive cash flow and generating profit.

While there’s no magic wand or switch you can flip to turn your business cash flow positive overnight, you can surely take the needed steps to manage your cash flow.

Becoming and remaining cash flow positive is a long-term business journey. Remaining alert, frequent cash flow monitoring and tracking, and making all necessary corrections shall eventually take you there.

What Does Cash Flow Positive Mean and Why Is It Important? (2024)


What Does Cash Flow Positive Mean and Why Is It Important? ›

If a business's cash acquired exceeds its cash spent, it has a positive cash flow. In other words, positive cash flow means more cash is coming in than going out, which is essential for a business to sustain long-term growth.

Why is positive cash flow important? ›

Positive cash flow indicates that a company's liquid assets are increasing. This enables it to settle debts, reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against future financial challenges. Negative cash flow indicates that a company's liquid assets are decreasing.

What does positive investing cash flow indicate? ›

A positive investing cash flow means that a company generates more cash from its investments than it is spending. This can be good or bad, based on how the company uses the extra cash. It can be good if a company reinvests its positive investing cash flow into growth opportunities.

What does a positive cash flow from operating activities indicate? ›

The cash flow from operating activities formula shows you the success (or not) of your core business activities. If your business has a positive cash flow from operating activities, you may be able to fund growth projects, launch new products, pay dividends, reduce the company's debt, and so on.

Is positive or negative cash flow better? ›

Companies and investors naturally like to see positive cash flow from all of a company's operations, but having negative cash flow from investing activities is not always bad. To make an evaluation of a company's investing activities, investors need to review the company's particular situation in greater detail.

Is positive cash flow more important than profit? ›

Cash Flow Helps With Business Growth

A steady, positive cash flow that is invested to expand your business is a far superior strategy than simply hanging on to small profits. Instead, growth due to continual cash flow can lead to heavy profits in future. It's a sign of the long-term prosperity of the organization.

What is the disadvantage of positive cash flow? ›

The main disadvantage of generating a positive cash flow is that because you're receiving extra income, you'll have to pay more tax.

What is a healthy cash flow? ›

A healthy cash flow ratio is a higher ratio of cash inflows to cash outflows. There are various ratios to assess cash flow health, but one commonly used ratio is the operating cash flow ratio—cash flow from operations, divided by current liabilities.

How do you show positive cash flow? ›

The easiest way to be cash flow positive is to bootstrap the business. That way, if you don't have enough cash, you'll go out of business. The fear of going out of business is a good motivator to focus on what will get a business to be cash flow positive, such as increasing revenue or reducing expenses.

How do you interpret cash flow statements? ›

A cash flow statement provides data regarding all cash inflows that a company receives from its ongoing operations and external investment sources. The cash flow statement includes cash made by the business through operations, investment, and financing—the sum of which is called net cash flow.

Why is cash flow important to a business? ›

Cash flow management means tracking the money coming into your business and monitoring it against outgoings such as bills, salaries and property costs. When done well, it gives you a complete picture of cost versus revenue and ensures you have enough funds to pay your bills whilst also making a profit.

Is positive cash flow from financing activities good? ›

If cash flow is positive, that means the business has engaged in more new debt or equity financing activities that bring cash in than it engaged in debt repayments. This is a great thing for cash on hand, as it may allow the business to expand, or stay alive during early-stage product development.

Is cash flow always positive? ›

Cash flow can be positive or negative. Positive cash flow means a company has more money moving into it than out of it. Negative cash flow indicates a company has more money moving out of it than into it.

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