What it means
Cash flow is about movement over time. A bank balance shows a position at a moment; cash flow explains receipts and payments during a period. In formal reporting, cash and cash equivalents have defined meanings. Not every investment that might eventually be sold belongs in that category.
IAS 7 organises cash flows into operating, investing and financing activities. These categories help distinguish day-to-day trading from transactions such as acquiring long-term equipment or raising borrowing. The detailed classification depends on the applicable requirements.
For everyday planning, the useful starting questions are simpler: what money is expected to arrive, when should it arrive, what must be paid, and what balance would remain? The timing and confidence attached to each amount matter as much as the total.
Why it matters
A growing business may pay for materials and labour well before receiving money from its customers. More orders can therefore increase the need for funding. A sales report by itself will not show whether the business can meet the next wage payment.
Cash flow also helps identify what is supporting the bank balance. Receipts from customers, a new loan and an owner's contribution all put money in the account, but they do not have the same meaning. Grouping them together as “income” can hide dependence on financing.
A practical cash view connects expected receipts to customer invoices and expected payments to obligations. It should explain assumptions, such as a promised payment date, instead of treating every invoice due date as money guaranteed to arrive.
Example in practice
Illustrative example: A business begins a month with R30,000 cash. It completes a job and invoices R40,000, but the customer will pay the following month. During the current month it pays R25,000 to workers and suppliers. Assume no other receipts or payments. Closing cash is R5,000, even though the sales invoice was issued.
If the customer later pays the R40,000, that receipt affects cash in the later month. It does not turn the earlier month into one in which the business already had the money. An owner considering another job should check whether the remaining R5,000 can cover the next commitments before accepting similar payment terms.
This example illustrates timing only. It does not calculate accounting profit, because a proper profit calculation needs the relevant income and expenses, including amounts that may not have been paid in cash.
What it is not
Cash flow is not turnover or profit. An unpaid sale, a non-cash expense and loan proceeds can each create differences between those measures and cash movement. A positive cash month is therefore not proof that trading was profitable.
A cash flow forecast is an estimate of future movement; a historical cash flow statement reports what happened. Both can be useful, but labelling the forecast period and assumptions prevents readers from mistaking projections for actual results.
Moving money between the business's own bank accounts should not be mistaken for new outside funding. Likewise, an approved borrowing facility is not the same as cash already received. A useful cash review distinguishes available balances, expected receipts and funding that still depends on conditions.
Sources and review
Checked on 30 September 2026. Use the linked official guidance for current requirements and forms.
- IFRS Foundation: IAS 7 Statement of Cash Flows
Supports the meaning of cash flows, cash equivalents and operating, investing and financing activities. Examples here are simplified illustrations, not prescribed cash flow statement formats.
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