Which of these statements about cash flow is true?

Positive cash flow refers to a situation where a company earns more cash than it spends within a given period. This is a critical aspect of financial management because consistently maintaining positive cash flow allows a business to meet its short-term obligations, reinvest in operations, pay dividends to shareholders, and maintain financial stability. Without positive cash flow, a company might struggle to cover its expenses, which could lead to financial distress.

This concept emphasizes the distinction between cash flow and profit. While profit is an accounting measure that reflects revenues minus expenses, cash flow specifically looks at the actual inflows and outflows of cash during a period. Therefore, having strong cash flow is often seen as a sign of a healthy company, even if accounting profits may fluctuate due to non-cash items like depreciation.

Understanding the importance of positive cash flow in business operations helps in evaluating the overall financial health and sustainability of a company. It highlights the necessity of managing cash effectively to ensure ongoing operational capacity and growth potential.