So What?

A couple of weeks ago, Naomi borrowed $20 from her friend Sidney. She promised to pay Sidney back by the end of the month—today—with money that she expected to earn by babysitting her cousins during her aunt’s business trip. Unfortunately, the aunt’s trip was cut short, so Naomi didn’t babysit as much as she had hoped. Now, she only has $14, which is not enough to pay off her debt. In other words, her cash flow is out of balance. She owes more money than she has.

Sometimes, businesses find themselves in the same situation. Sales revenue may go down even when expenses do not, making it difficult to pay all of the bills coming due. To avoid this problem, businesses monitor their cash flow—using cash flow statements.