Where Cash Comes From and Where It Goes
The three sources and uses of cash, and the people across the business whose decisions move it.
11 min
Activities: 0 of 3
Three streams of cash
Every movement of cash in a business belongs to one of three streams. Operating cash comes from trading: customers pay, and the business pays suppliers, staff, rent and tax. Investing cash goes into long-term assets such as equipment, buildings, systems and acquisitions, and comes back when assets are sold. Financing cash comes from owners and financiers and goes back to them as repayments and distributions.
A healthy, mature business generates more operating cash than it needs, and uses the surplus to invest and to reward its financiers. A young or fast-growing business often uses more cash than it generates and depends on financing to cover the gap. Knowing which stream is carrying the business is the first question in any cash conversation.
Who moves the cash
Two cases
A steel fabricator reports good profits for three years but needs ever more financing. Analysis of the three streams shows operating cash is barely positive, because customers' payment terms have drifted from 45 to 80 days. The cause sits in sales contracts, not in the finance office.
A software company shows a large operating cash inflow because customers pay annual subscriptions in advance. Its investing outflows on product development are larger still. It is not short of cash today, but its cash position depends on continuing to sign new customers who pay upfront. A slowdown in sales would affect cash before it affected profit.
Match each movement to its stream
- Customer pays an invoice
- Purchase of a new forklift truck
- New capital from the owners
- Salaries paid
A sales manager offers a large customer 90-day terms instead of the usual 30 days. Which statement is most accurate?