Cash and cash flow

Cash is money a business can use straight away. It includes notes and coins in a till and money in a bank account that can be spent immediately.

Cash flow is the movement of cash into and out of a business over a period, such as a week or a month. Money arriving is a cash inflow; money paid out is a cash outflow.

Why a business needs cash

Cash has to be there when payments are due. A business needs it to pay suppliers for stock and materials, to cover overheads such as rent and electricity, and to pay employees their wages on time.

Timing is the tricky part. Money coming in and money going out rarely happen on the same day. If several bills are due before customers pay what they owe, the business can run short even when it is busy and making sales.

For example, a mobile pet-grooming business might receive £60 from each customer after an appointment. In one week it receives £600 in cash from ten appointments. That same week it must pay £180 for van insurance, £90 for grooming supplies and £230 in wages. The cash coming in is £600 and the cash going out is £500, so the business has £100 more cash at the end of the week. If the insurance payment had been due a week earlier, before the appointments were paid for, the same business could have been short of cash despite having plenty of work booked.