Cash flow is the money a company receives or pays out for various business activities. Activities driving cash flow can be purchasing economic resources, paying workers for their labor, selling goods and services to consumers, or obtaining financing from banks and investors. All companies need cash flow to survive in a business environment. Developing copious amounts of cash inflows can have significant advantages for a company.
Growth
Cash flow helps a company grow its business in the economic marketplace. Business owners and managers can use positive cash flow streams to purchase new equipment or facilities to increase production output. This re-investment process creates a cycle of improving a company's operations where the business can re-tool operations and find ways to better its position in the economic market. Companies with strong working capital balances can also avoid external financing, which often includes bank loans that create cash outflows via loan payments.
Competitive Advantage
Companies can use steady cash flows to purchase higher quality business inputs for their operations. Business inputs often include raw materials for producing goods and services or skilled labor. These inputs can create a competitive advantage because the company can produce goods and service better than its competitors. Although these inputs are more expensive, current cash flows pay for these items and may lead to higher cash inflows from better consumer products sold in the marketplace.
Long-term Outlook
Creating a steady cash inflow from business operations can retain this cash to work through periods of low sales. Companies can also mitigate the effect of sluggish economic periods, such as recessions or depressions. High cash balances help companies remain flexible and rely on their own resources rather than using trade credit or loans. Companies can also reinvest their cash inflows into short- or long-term marketable securities so they earn interest on their capital. This creates a passive income stream in addition to the operational cash inflows.