If we look at cash flow, the most fundamental definition of the term is – “the net amount of cash and cash-equivalents being transferred into and out of a business.”
A cash flow statement is one of the most important reports of the company that assesses the company’s liquidity, flexibility, and company’s overall financial position. Assessing the amounts, timing, and uncertainty of cash flows is one of the most basic objectives of financial reporting and helps to make financial decisions.
Positive cashflow shows that an organization is adding to its cash reserves, permitting it to reinvest in the organization, payout cash to investors, or settle future payments. Negative cash flow is the point at which the business has more outgoing than incoming cash and can’t cover costs from sales alone. All things considered, cash from external sources (other than revenue) is needed to compensate for a shortfall.
At the point when the business has positive cash flow, it implies that the money inflows surpass money outflow. Now, for an organization to be profitable, it needs to have more cash coming in than it does going out. So when more receivables than payables are recorded, it tends to be not difficult to expect that the business is making a profit. Yet, that is not generally the situation. Businesses can be profitable without being cash flow positive—and can be cash flow positive and yet not make a profit.
A lot of the organizations use an accumulation bookkeeping system in which transactions of any kind are recorded before the actual exchange of money takes place. A situation can arise where the organisation, at the end of due date does not receive cash but the cash flow statement would still show a positive statement and a profit on paper.
Therefore it is necessary to ensure that there is actual physical cash in the business’s account and a positive cash flow statement just on paper won’t ensure that the company is making a profit. A real positive cash flow statement would allow the company to grow and expand its business by making cash available to venture into newer activities.