What is cash flow?

Cash flow is the movement of money into and out of a business over a period of time. Net cash flow is what comes in minus what goes out. It matters because a business pays its bills with cash, not with profit, so cash flow shows whether it can keep operating.

How it works

Inflows include customer payments, loans and investment. Outflows include wages, suppliers, rent, taxes and loan repayments. The balance at the end of a period is the opening balance plus net cash flow. Timing is the main difficulty: a sale recorded as profit today may not be paid for 60 days, while rent is due now.

Cash flow is often grouped into operating activities, investing in assets, and financing from lenders and owners. Positive cash flow lets a business save and invest, while sustained negative cash flow draws down reserves until it must borrow or stop. Growth can itself be a drain, because you pay for materials and wages before the customer pays you.

Example

Say a studio earns 50,000 per month in invoices, but clients pay 60 days late, and it pays 40,000 per month in costs immediately. On paper it makes 10,000 profit per month. In cash terms, for the first two months nothing arrives while 80,000 goes out, so the balance is down 80,000. Only from month three do inflows of 50,000 start, leaving a positive net of 10,000 per month. It needs at least 80,000 in reserves to survive the gap. These are illustrative numbers.

How to model it in Machinations

Draw a cash Pool with a Source for customer payments, passed through a Delay equal to the payment terms, and a Drain for costs. A Register shows net cash flow each step. Set the Delay and the sales level as Levers, and add an End condition if the Pool goes below zero. Play and chart the Pool, then lengthen the Delay to see how a profitable business can still run out of cash.