Legal Definitions - cash flow

Cash flow refers to the total amount of money moving into and out of a business, project, or personal finances over a specific period. It is a crucial indicator of financial health, showing the actual liquidity and solvency of an entity. Positive cash flow means more money is coming in than going out, while negative cash flow indicates the opposite.

Here are a few examples illustrating cash flow:

• For a Small Business: Imagine a local artisanal bakery. Its cash inflows include all the money received from customers purchasing bread, pastries, and custom cakes. Its cash outflows consist of payments for ingredients, employee wages, rent for the shop, utility bills, and loan repayments for baking equipment. At the end of a month, if the total cash collected from sales is significantly higher than the total cash paid out for all these expenses, the bakery has a strong positive cash flow, indicating it has sufficient money to cover its operations and potentially expand.

• For a Household Budget: Consider a family managing their monthly finances. Their primary cash inflows are their combined salaries from employment, along with any investment dividends or occasional freelance earnings. Their cash outflows encompass mortgage payments, grocery bills, car insurance, utility costs, and discretionary spending on entertainment or dining out. If their total monthly income consistently exceeds their total monthly expenses, they maintain a positive cash flow, allowing them to build savings, invest, or pay down debt. Conversely, if expenses regularly surpass income, they face negative cash flow, which might necessitate borrowing or drawing from savings.

• For a Real Estate Investment: An individual who owns a commercial office building that they lease out experiences cash flow from this investment. The main cash inflow is the rent collected from tenant businesses. The cash outflows include property taxes, building insurance, maintenance costs, property management fees, and any mortgage payments on the building. If the rental income consistently covers all these expenses and leaves a surplus, the investor enjoys a positive cash flow from the property, providing a steady stream of income after all operational costs are met.