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:
Benefits of keeping track of both: