As the name suggests, cash flow refers to the cash that flows in and out of a business. It may sound simple but it’s one of the most essential concepts to understand for business owners. After all, if a business does not have enough cash to pay its bills, there could be trouble.
A cash flow statement makes up one of the three required financial reports that publicly traded companies are legally obligated to create and retain in order to provide visibility over the company’s financial position.
Income statements show net income. Balance sheets show assets, liabilities, and shareholder’s equity, and cash flow statements show a company's cash position on a monthly, quarterly or annual basis across three activities - operating activities, investing activities, and financing activity. We’ll dive deeper into cash flow below: