4 Essential Terms for Positive Cash Flow

It happens all too often for small businesses: they are making money on the books and yet there never seems to be enough working capital to keep the company operations running. There are several reasons this could be happening. In order to devise a solution, it is essential to understand the difference between four key business finance terms.


Being profitable is defined as the difference between the amount earned and the amount spent on operating a business. Your business can technically be profitable without having working capital, due to large business loan debt or rapid growth in inventory, accounts receivable, or fixed assets. Spending money on all these things does not enter into profitably formulas, even though they certainly affect a business’s cash flow.

Cash Flow

Cash flow refers to money moving in or out of a business. In accounting terms, cash flow is calculated by taking the amount of cash available at the beginning of a month or year and subtracting the amount of cash available at the end of that period. This can result in either positive or negative cash flow. If your number is going in the wrong direction, you can increase cash flow with actions like increasing your sales, reducing your costs, selling off some of your assets, or taking out business loans.

Return on Investment (ROI)

Return on Investment (ROI) is a measure of how much you have gotten out of your initial investment into your business. It is calculated by the net profit from an investment and dividing it by the cost of that investment. This is not the same thing as profit or how well the business is doing, but rather it shows the overall benefit or return of the company compared with how much was initially needed to get it started.

Return on Sales (ROS)

The ROS evaluates your business’ operating profit margin. In essence, it is defining your efficiency. ROS is calculated by dividing your pre-tax net income by your sales. If this number has been growing over time it means your business is becoming more efficient with its resources and a decreasing number means that problems have crept into your operations.

Having these four terms under your belt will help you figure out where your working capital should be coming from and how you can bring it up to the right amount for your business.


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