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Beginner

What is cash flow

Also known as: cash flow statement, cash flow forecast, positive cash flow, negative cash flow, free cash flow, cash inflows and outflows

Definition

Cash flow is the money coming into and going out of a business's account in a period. A profitable business can still run short of cash when customers pay late.

Why it matters

In the short term, cash decides whether the business can pay salaries, suppliers and rent on time.

Common mistakes

Treating profit on the P&L as cash available to spend.

Related terms

Worked exampleIllustration

The same month on the P&L and in the bank

Profit and loss, the month

  • Revenue invoiced₪100,000
  • Cost of sales-₪40,000
  • Operating expenses-₪35,000
  • Operating profit₪25,000

Bank account, the same month

  • Received from customers+₪60,000
  • Paid to suppliers-₪40,000
  • Operating expenses paid-₪35,000
  • Change in the balance-₪15,000

The gap

  • Invoices customers have not paid yet₪40,000

Steps

  1. The business invoices ₪100,000 this month. Some customers pay right away and the rest are on terms of 45 days after the end of the month, so only ₪60,000 of it comes in now.

  2. It pays suppliers ₪40,000 and operating expenses of ₪35,000.

  3. The P&L shows operating profit: 100,000 minus 40,000 minus 35,000.₪25,000

  4. The bank shows 60,000 in and 75,000 out.-₪15,000

  5. The gap between the two is the money customers still owe.₪40,000

Profit and cash are two different numbers for the same month. Collect faster, agree longer supplier terms, or keep a cash buffer.

Illustration

How it works

Cash flow is the tank: ₪60,000 came in from customers, ₪75,000 went out to suppliers and expenses, and the gold marker is the net change, -₪15,000, in a month the P&L calls profitable.Cash in the bankCash in₪60,000Cash out₪75,000Net change-₪15,000
Cash flow is the tank: ₪60,000 came in from customers, ₪75,000 went out to suppliers and expenses, and the gold marker is the net change, -₪15,000, in a month the P&L calls profitable.

Profit on paper, cash in the bank

  1. Operating profit on the P&L₪25,000
  2. Invoices customers have not paid yet-₪40,000
  3. Change in the bank balance-₪15,000

Customers paid ₪60,000 of the ₪100,000 invoiced (60%). The P&L shows ₪25,000 of operating profit, and the bank shows -₪15,000, because ₪40,000 is still with the customers.

The same month twice: the operating profit the P&L shows, the invoices customers have not paid yet, and what that leaves in the bank.

Definition

Cash flow is the money moving into and out of a business's account over a period, a week, a month or a year. It is positive when more came in than went out, and negative when the opposite happened. The international standard IAS 7 sorts it into three kinds: operating cash flow, from the daily work (customer payments in, salaries, rent and suppliers out), investing cash flow (buying equipment, selling a vehicle) and financing cash flow (a loan and its repayments, an owner's deposit or withdrawal). The report that shows the three is the cash flow statement. Free cash flow, a common shorthand, is operating cash flow minus the money spent on equipment and other long lived assets. Cash flow differs from profit in timing: the P&L records a sale when it is invoiced, but the cash arrives when the customer pays, and stock, equipment and loan repayments take cash in ways the P&L spreads out or does not show.

Why it matters

In the long term, a business without profit runs out of cash anyway, so the two answer different questions. The gap between invoicing and getting paid is one of the common reasons profitable small businesses find themselves short of cash. A negative month is not always bad news: buying equipment or building stock before a busy season takes cash on purpose. What matters is seeing the dip coming.

Directly related: Runway, Burn rate, P&L.

Improvement tips

  • Keep a rolling 13 week cash forecast and update it every week from the payments that actually came in and went out.
  • Invoice on the day the work is delivered, and follow up on the due date, not a month after it.
  • Match what you promise suppliers to what customers actually pay you, so money goes out after it comes in.
  • Plan equipment purchases and seasonal stock in the forecast in advance, so the dip they cause is expected.

Common mistakes

  • Reading a negative month as a failure without checking why: equipment or stock bought before a season can be a sound reason.
  • Committing to hires or projects before the customers' money has actually arrived.
  • Keeping no cash buffer for late payers, a slow season and the periodic tax payments.

Related terms

FinanceBeginner

Runway

Runway is the number of months a business can keep going on the cash it has today, at its current pace of spending and income: cash divided by monthly net burn.

FinanceBeginner

Burn rate

Burn rate is how much cash a business loses each month. Net burn subtracts what came in, gross burn counts only what went out. Cash ÷ net burn gives runway.

FinanceBeginner

P&L

A P&L (profit and loss statement, or PnL) sums up a business's revenue and expenses for a period and shows if it made or lost money. Profit on it is not cash.

StartupsBeginner

Business Model

A business model explains how a business makes money: who pays, for what, and why delivering it costs less than the price the customer pays.

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Quick check

A business invoiced ₪100,000 this month and shows ₪25,000 of operating profit, yet its bank balance fell by ₪15,000. What is the most likely reason?

Choose an answer

Frequently asked questions

Do I need to understand cash flow before I start a business?
Yes. It tells you when money will actually arrive and leave, not only how much. Without it a plan can look profitable and still run out of money in the third month.
When does cash flow first become relevant for a new business?
Before the first sale. Setup costs go out long before customers pay, so the first forecast decides how much money you need to start with.
How can a new business manage cash flow before it launches?
Keep fixed costs low, delay large purchases until customers are paying, ask for deposits where it is normal in your field, and arrange any credit line before you need it. Show the credit line as a separate figure, not as cash you have.
Is cash flow more important than profit?
They answer different questions. In the short term cash decides whether you can pay this month's bills. In the long term a business without profit runs out of cash anyway, so you need both.
Why does cash flow matter for a business that is already running?
Salaries, suppliers and rent are paid in cash on fixed dates. A good year on paper does not help if the money is sitting in unpaid invoices when those dates arrive.
What goes wrong when a business ignores its cash flow?
Payroll or a supplier payment is missed, the bank account goes into overdraft, and the business ends up borrowing expensively for a problem it could have seen weeks earlier.
How do I start tracking cash flow without stopping daily work?
Open a sheet with the next 13 weeks in columns. Write the payments you expect in and out each week, and once a week replace the forecast with what actually happened. It takes less than an hour a week.
How do I fix cash flow problems in a running business?
Invoice on time and chase overdue payments, ask for deposits on new work, agree longer terms with suppliers, and move purchases that can wait. Look at who owes you money before you look for new money.
What does cash flow mean in plain words?
The money that comes into and goes out of your business account. It has three sources: the daily work, buying or selling equipment, and loans or money the owner puts in or takes out.
Is cash flow complicated to track?
No. Your bank account already records every movement. Tracking cash flow means reading it regularly and writing down what you expect in the coming weeks.
Do I need an accountant to manage cash flow?
You can track and forecast cash yourself, from the bank account and a simple sheet. The accountant prepares the formal financial statements, and a business consultant can help build the forecast and decide what to do with it.
How long may a customer take to pay me in Israel?
The Suppliers Payment Ethics Law of 2017 sets, for most private businesses as it defines them, payment to suppliers no later than 45 days from the end of the month in which the invoice was submitted, with other terms for public bodies and some fields. Check the definitions in the law for your case. Educational material, not tax or legal advice.

Sources: IFRS Foundation, IAS 7 Statement of Cash Flows, checked September 2026, Suppliers Payment Ethics Law, 2017 (Israel), text on nevo.co.il, checked September 2026

Last reviewed: 2026-09-23

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Struggling with the numbers side of your business?

Alex helps Israeli owners get cash flow, pricing and profit under control. The first call is free.

+972 055-248-6151. Better on WhatsApp: I am in meetings most of the day and answer as soon as I am free.