Cash flow in a business has the same effect as what fuel has to an engine. The more the air mixes with fuel, the more combustion occurs and the more efficiently the engine works. In the same way the flow of cash can be termed as a measure to gauge the efficiency of a business. The faster the cash flows into a business, the better it can perform as a whole and be categorized to be a successful business.

The cash flow model is critical to both companies and investors. It’s often the case that companies can go bankrupt if they suffer from cash flow issues and this holds true especially for small businesses.

What is good cash flow?

Quite simply, in the cash flow model, good cash flow management boils down to two things. On the one hand, you need to keep on top of the money coming into your business, by making sure that you're paid on time. On the other hand, you need to keep a tight rein on your spending. So, it’s all about balancing your incomings against your outgoings.

There are 3 Major Components to a Cash flow model:

• Cash flows from operating activities :
  Refers to the cash that has been generated by the company via its core business. Positive or negative outlook of the number would give an indication of how the company is performing.

• Cash flows from investing activities :
  This refers to the company's investments in the long term. The activities may include buying a new company or taking over its operation. Such activities would require money to be injected in, which is captured on a cash flow statement as negative cash flow. Similarly, if a company sells off old equipment or sells a division of its operations to another firm, these activities are also captured on paper as income from investing.

• Cash flows from financing activities:
  Companies often borrow money to fund their operations and acquire another company or make other major purchases. Timely operational expenditures, such as meeting payroll requirements, would be one reason for cash-flow financing. 

What are the business implications of the Cash Flow Model?

Having a positive cash flow is imperative for a company’s long term success. The way that cash flow is captured and tracked plays a significant role in how businesses project their financial health to potential investors. A brief overview of cash and accrual accounting provides insight into the way accounting rules require companies to record revenues and expenses. By implying accrual methods the business can increase the revenues.

Investor Key Indicators:

• Positive cash flow:
  Although positive cash flows are always good, the investor must note that if the company has made profits by the selling of an asset then it can’t be categorized as a recurring event. When reviewing the numbers, it is critical that income generated by such non-recurring events such as sale of fixed assets, securities, retirement of capital obligation or litigation must be taken into complete consideration. Any or all of these numbers could represent a one-time profit or loss that would distort the firms’ prospects if viewed as recurring items.

• Negative Cashflow:
  Negative numbers can potentially mean the company is servicing debt, however it can also mean the company is making dividend payments and stock repurchases, which investors might be glad to see. While "negative" cash flow doesn't sound good, it isn't always bad - sometimes you've got to spend money to make money, speculate to accumulate.

• Cash Flow: Crux
  Cash flow acts as the health check to the business. Though complex, it is the one single source of data that would provide insight on how the business is performing especially for investors.