Cash is the rocket fuel that powers growth for all kinds of businesses. Leaders must understand where their cash goes and where it’s going to come from. They need to plan for those negative and positive cash flows and they especially need to plan ahead if they will need external funding.
There are two broad types of sources of cash for a business — inside funding and outside funding. Inside funding can include cash provided personally by the management team, but more sustainably a healthy business will generate cash through sales that will more than cover operational costs. Outside funding includes cash borrowed from lenders (debt), cash provided by investors in exchange for equity (ownership) in the business, and sometimes government or private grants.
Cash flows out of the business in three types of activities. The most consistent and significant are the expenses of operating the business. The most strategic outflows are investments made in the business. Finally, the company may use cash to pay back loans or to distribute dividends to investors.