What is cash flow?

By Book Keeping Pros
Sources checked 15 Oct 2026

Definition

Cash flow is the movement of money into and out of a business. Money comes in from cash sales, customer payments and grants, and goes out on stock, rent, wages, utilities and other bills. When more comes in than goes out over a period, cash flow is positive; when less does, it is negative.

Cash flow is about timing. A business can be profitable and still run short of money if customers pay slowly, stock has to be bought well before it sells, or large bills land close together. A month that ends with positive cash flow can still contain weeks where more went out than came in.

Bookkeeping is what makes cash flow visible. Up-to-date records of invoices sent, bills received and bank transactions show what is owed to the business and what it owes, so the money due in and out over the coming weeks can be seen, not just today's bank balance.

Cash moving through a business is often grouped by where it comes from. Operating activity covers customer receipts and payments for stock, wages and running costs. Investing activity covers buying or selling long-term assets such as equipment or vehicles. Financing activity covers loans drawn and repaid, and money the owners put in or take out. Seeing the groups separately shows whether trading alone brings in more cash than it uses, which a single bank balance can hide.

In Australia

business.gov.au defines cash flow as the money flowing in and out of a business. Its guidance on improving cash flow notes that cash flow can be unpredictable, because things outside your control, such as rising material costs or seasonal swings, change how money moves through a business, and suggests planning to have enough cash to get through known quiet periods.

Its guide to managing cash flow sets out practical steps, including keeping records of all sales and costs, sending clear invoices as soon as you make a sale, setting payment terms, following up customers who have not paid and reviewing your cash flow statement regularly.

The guide also names warning signs that cash flow may be under pressure, such as difficulty paying bills, leaning on credit or holding back payments to suppliers. It suggests negotiating supplier payment terms so cash stays in the business for longer, giving the example of asking for 60 days to pay rather than 30. The improve cash flow guidance adds that holding more unsold stock leaves a business with less money.

Worked example

Illustrative example: cash in and cash out over a month, week by week
Week	Cash in (AUD)	Cash out (AUD)	Net cash flow (AUD)
Week 1	6,200.00	4,100.00	2,100.00
Week 2	3,400.00	5,900.00	-2,500.00
Week 3	7,800.00	3,600.00	4,200.00
Week 4	2,900.00	6,300.00	-3,400.00
Month	20,300.00	19,900.00	400.00

Illustrative example only: these rows show the method and are not sourced data.

Common mistakes

Judging cash flow from the bank balance alone, without allowing for bills already received and money customers still owe.
Reading money from a new loan as if it came from trading.
Letting invoicing fall behind, which pushes back the day customers pay.
Paying large yearly bills, such as insurance or registrations, without setting cash aside in the months before they fall due.
Taking money out for the owners or buying equipment after a strong month without checking the bills and repayments due in the weeks ahead.

Common questions

What is the difference between cash flow and profit?

Profit compares income earned with expenses incurred over a period, while cash flow follows the money that actually moved. The two drift apart for ordinary reasons: a sale on credit counts towards profit before the customer pays when the books are kept on an accrual basis, while a new loan, the purchase of equipment and the repayment of a loan's principal move cash without changing profit by the same amount. Depreciation works the other way, reducing profit with no cash leaving the business.

Why is cash flow important for small businesses?

Bills, wages, rent and suppliers are paid with cash, not with profit, so a small business with little in reserve can run into trouble in a single slow month. Steady cash flow lets an owner pay on time, keep good terms with suppliers and take up chances such as a bulk stock order. Watching it closely gives warning of a shortfall early enough to chase overdue invoices, hold back spending or arrange finance.

What is the difference between cash flow and working capital?

Cash flow is movement over a period: what came in and went out across a week, a month or a year. Working capital is a position at one date, usually worked out as current assets, such as cash, stock and money customers owe, less current liabilities, such as supplier bills due within 12 months. A business can have healthy working capital and still feel a cash squeeze if most of it is tied up in stock or unpaid invoices.

How do you calculate cash flow for a business?

Add up all the cash received in the period, then take away all the cash paid out; the result is net cash flow, positive or negative. Adding it to the opening bank balance should give the closing balance, and where it does not, a bank reconciliation helps explain the difference. For planning ahead, the same layout becomes a forecast: list the receipts and payments expected in each coming week or month from invoices due, bills received and regular costs.

Related terms

Related service

Management and cash-flow reports

Monthly reports that show where the business stands.

More about management and cash-flow reports

Sources

Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
Improve your cash flow
business.gov.au, Australian Government. Current at 16 October 2026, released 20 May 2025. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
Guide to managing cash flow
business.gov.au, Australian Government. Current at 15 October 2026, released 22 December 2025. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.