A firm's cash flow is the movement of cash in and out of the firm in the form of payments to suppliers and collections from customers. Cash flows typically arise from three sources: operations, investing, and financing.
Business firms must file a Statement of Cash Flows as one of their required financial statements. The Statement of Cash Flows shows the movement of cash through operations (current assets and liabilities), investing (plant and equipment and investments), and financing (long-term financing and dividends).
Cash flows are essential to the liquidity or solvency of the business firm. Cash flows are not the same thing as profit. Profit is arrived at through developing the income statement by accrual accounting. In order to develop the Statement of Cash Flows, you take the data from the income statement and use cash accounting to convert profit to cash flows.
Companies need to keep a close eye on their cash flows. To do this, they should develop cash budgets on at least a monthly basis. Developing a cash budget means comparing cash receipts or revenues with cash disbursements or payments and determining net cash flow. This is how the small business owner knows how much cash is available each month.