Cash flow

What cash flow means

Cash flow is the actual movement of money in and out over a period. It differs from profit because profit is a calculated figure and money is a bank balance. Two events show the difference most clearly: an order invoiced in December and paid in January is profit in December and cash in January. Goods bought in November and sold in February are cash out in November and profit in February.

For online retail that distinction is central, because advance payments are common here. Anyone paying for goods up front and selling later finances the supplier and the storage period.

Why growing shops get into trouble

Growth consumes money before it produces money. Anyone selling more has to buy more goods, pay more staff and advance more advertising, while the income arrives only after delivery and payment terms. The result grows, the bank account empties. That effect explains a large part of insolvencies at businesses that are in fact doing well.

Payment terms make it worse. Purchase on invoice gives the customer 14 to 30 days while the supplier is paid immediately or within a short period. That gap has to be bridged from own funds or a loan, and the faster a shop grows the wider it gets.

How cash flow is steered

• Align payment terms: anyone granting customers long terms should negotiate short ones with suppliers. The gap between the two is the funding requirement.
• Lower stock: slow moving goods tie up money. Every delisted item releases liquidity.
• Use deposits: with made to order goods and in B2B, deposits are common and relieve the balance immediately.
• Plan ahead: a liquidity plan over twelve weeks shows bottlenecks before they arrive. Anyone watching only the balance sees them a day late.
• Stagger investments: large expenses belong in a period with strong inflow, not in the middle of the Christmas season.

Which figures help

Three values are enough to start. Operating cash flow shows what remains from the running business. The cash conversion cycle measures how many days lie between paying for goods and receiving money. And the liquidity reserve shows how many months could be bridged without revenue. The third value is the most important and is collected least often.

Frequent questions

• Can a business be profitable and still fail? Yes, and it is not rare but the normal case with fast growing companies.
• Is cash flow the same as the bank balance? No, the balance is the end point, cash flow is the movement towards it.
• What is the most important measure in a crisis? Negotiating payment terms with suppliers, because it works faster than raising revenue.