Definition
Cash flow is the movement of money into and out of the business over a period. Positive cash flow means more came in than went out. It is not the same as profit.
Profit is not cash
Profit is calculated on goods sold. Cash flow follows when money actually moves. The gap between the two is mostly stock: you pay for goods first and recover the money slowly as they sell. Stock sitting on the shelf is cash that cannot pay the rent.
A worked example
A shop has $1,500 in cash at the start of the week. On Monday the owner pays $2,000 for a bulk order from the distributor, with $500 borrowed from a relative. The goods will sell over about three weeks, with a healthy margin. By Thursday, rent of $600 is due and the till has only $450 in it. On paper the shop is profitable. In practice the owner cannot pay the rent.
The shop did nothing wrong in terms of profit. It simply put too much cash into slow stock at once. Splitting the order into two smaller ones, or timing it after rent, would have kept the cash.
Keeping cash flow healthy
- Know your due dates: list rent, supplier payments and wages for the next four weeks.
- Buy to the [reorder point](/glossary/reorder-point), not to the biggest discount. A bulk saving that ties up cash for months may not be a saving.
- Watch [slow-moving stock](/guides/slow-moving-and-dead-stock). It is cash in a box.
- Separate shop cash from personal cash, or you cannot see either clearly.
More in cash flow for shop owners. Shopkeepa's inventory value and restock list help you see how much cash is sitting in stock.
Related terms
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