Cash flow vs. Liquidity - What is the difference?

When you are a new entrepreneur, you will soon come across the terms cash flow and liquidity. They may not sound the same - but the difference between them can still be confusing. Here's a simple explanation to make it crystal clear!

Cash flow = Money moving in and out

Cash flow is about how much money actually comes into your business and how much goes out during a given period - often a month.

Example:
You get paid by a customer → positive cash flow
You pay an invoice → negative cash flow

Liquidity = Your ability to pay right now

Liquidity is about how much money you have available in your account - or can get quickly - to pay your bills today.

Example:
You have £50,000 in your account → good liquidity
You have €0 in the account but invoices of €30,000 → poor liquidity

The difference in one sentence:

• Cash flow shows how money moves over time
  
  
• Liquidity shows how much money you have to move around with right now
  
  

Benefits of keeping track of both:

• You avoid liquidity crises despite profits
  
  
• You can plan the future without guessing
  
  
• You build a stable business with margins