Cash Flow

Cash flow is the actual movement of cash in and out over a period. It is easy to confuse with profit, but profit is an accounting figure that includes money you have merely earned the right to, while cash flow is what really moved through the account.

The classic gap between the two is credit sales. Sell $1 million of goods but agree to be paid in six months, and the books show $1 million of revenue and a profit while not a cent has arrived. When payroll and rent come due in that state, a profitable company can still collapse. That is insolvency despite profit.

Company statements split cash flow into three parts: operating cash flow from the core business, investing cash flow from buying and selling assets or stakes, and financing cash flow from borrowing, repaying, and paying dividends. Rising profit alongside persistently negative operating cash flow is a signal that the numbers and reality are drifting apart.

The same logic applies to a household. However high the salary, if fixed costs and loan payments nearly match what comes in, cash flow is tight. So what matters as much as the size of your assets is how much is left each month, and that is exactly why keeping a few months of expenses as an emergency fund is worth it.