Cash Flow . . . 

is the money coming into (actually received) and going out of (actually disbursed) a business. The three main sources of cash coming into a company are product sales, stock sales, and borrowing. Operating expenses (for example, payroll), capital expenditures (for example, equipment purchases), and debt service on borrowed money (interest and principal payments) account for most of the cash going out.

Careful planning for future cash needs, as reflected in regularly updated company cash flow projections, is important to running a successful business and to attracting outside capital to fund company growth. Venture capitalists are very interested in whether a company will have sufficient cash flow and very sophisticated in analyzing a company's need for cash. Most investors will study a company's monthly cash flow projections carefully before making an investment decision.

Inadequate cash flow can cause acute problems for any business. A shortage of cash can create a series of crises that divert management from the crucial business of running the company to the business of searching for "new" money. Cash flow problems quickly become visible to suppliers and competitors and can be used by them to suggest to customers that the company is unstable and, therefore, unreliable. The damage such suggestions can cause, even if unfounded, is considerable.

For a company anticipating rapid growth, the problems can be compounded. Fast growth, even with growing profits, can put extreme pressures on a company's available cash. Growing sales are usually accompanied by demands for cash that grow faster than the growth in cash receipts. This is due, in part, to the fact that more sales create more receivables before they create more cash receipts. At the same time, demands for payment from suppliers grow, and other new expenditures must be made to support the growth. Many of these expenditures cannot be delayed. The mistiming of the receipt of funds and their disbursement can become so severe that profitable expansions must be postponed. Because of this possibility, companies should thoroughly analyze and review their anticipated cash flow needs on a regular basis, even when they are not searching for capital. See: Debentures, Debt Service, Equity, Leverage.