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Cash flow
Also called operating cash flow, net cash flow, free cash flow.
The actual movement of money in and out of the business over a period, which is what funding is repaid from and is not the same as profit.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
Profit is an accounting measure that recognizes revenue when earned and costs when incurred. Cash flow records when money moves. The gap between them is why profitable businesses run out of money: revenue is recognized on invoicing but arrives in 60 days, inventory is paid for months before it sells, and a debt payment is a cash outflow that never appears as an expense in the principal portion.
Lenders assess it three ways. Bank-statement funders read the account directly. Banks and SBA lenders reconstruct it from tax returns and financial statements, adding back non-cash items and owner discretionary expenses to reach a cash figure, then test it against total debt service. Asset-based lenders care less, because they look to collateral conversion.
The vocabulary is worth pinning down. Operating cash flow is what the trading activity generates. Free cash flow is what remains after capital spending. Net cash flow is the change in the bank balance, including financing activity, which is why a business can show positive net cash flow in a month simply because it took an advance.
Daily and weekly debits attack cash flow at its most sensitive point: timing. A fixed debit takes money on days when nothing has come in, so a business with adequate monthly cash flow can still fail a Tuesday.
Where this one catches people
Every dollar of an advance payment reduces cash flow, but only part of a loan payment reduces profit, and none of an advance payment does in the way owners expect. Owners looking at a profitable P&L while the account empties are usually watching debt principal and daily debits, neither of which appears as an expense. Read the bank account, not the income statement, when judging whether another payment fits.
Worked through
Monthly revenue 100,000, expenses 85,000, profit 15,000. Two advances taking 550 and 400 a day cost roughly 950 x 21 = 19,950 a month. The business is profitable and short 4,950 in cash every month, which it covers by delaying payables until it cannot.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
Where you will meet this term
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Cash flow — common questions
What does cash flow mean?
The actual movement of money in and out of the business over a period, which is what funding is repaid from and is not the same as profit.
Where does cash flow catch people out?
Every dollar of an advance payment reduces cash flow, but only part of a loan payment reduces profit, and none of an advance payment does in the way owners expect. Owners looking at a profitable P&L while the account empties are usually watching debt principal and daily debits, neither of which appears as an expense. Read the bank account, not the income statement, when judging whether another payment fits.
Is cash flow the same as an interest rate?
Cash flow is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does cash flow apply to?
Merchant Cash Advance, Working Capital, Term Loan, Business Line of Credit, SBA Loan, Revenue-Based Financing.
Is there a worked example of cash flow?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside cash flow?
Annual revenue, Average daily balance, Bank statement underwriting, Current ratio, Debt service coverage ratio.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.