What Is Inbound Cash Flow?
- Inbound cash flow is any currency that a company or individual receives through conducting a transaction with another party.
- This includes sales revenue, refunds from suppliers, financing transactions, and amounts awarded as a result of legal proceedings.
- A lack of inbound cash flow can stunt growth, force a company to use costly lines of credit, and even cause operational issues.
Understanding Inbound Cash Flow
Inbound cash flow includes sales revenue generated through business operations, refunds received from suppliers, financing transactions, and amounts awarded as a result of legal proceedings. The term can also be used to indicate positive cash additions to a person's bank account.
When a salesperson is paid for their labor, it represents an inbound cash flow for the employee — and an outbound cash flow for the employer. Meanwhile, if that same member of staff successfully completes a sale to a customer, it results in an inbound cash flow for the company and an outbound one for the buyer.
Having more cash coming in than going out is fundamental. For a company, positive cash flow signifies that liquid assets are increasing, giving it greater headroom to settle debts, pay expenses, reinvest in the business, return money to shareholders, and provide a buffer against future financial challenges.
Example of Inbound Cash Flow
Consider a company participating in a round of debt financing. A company that issues bonds is borrowing money, which must be repaid over time — with interest. At the time of the bond issuance, the company receives the cash and reports an inbound cash flow. However, it must then start to pay back the bond, triggering an outbound cash flow.
A company’s inbound and outbound cash flows are recorded in its cash flow statement.
Inbound Cash Flow vs. Outbound Cash Flow
Outbound cash flow is the opposite of inbound cash flow, describing any money a company or individual must pay out when conducting a transaction with another party. Examples include cash paid to suppliers, wages given to employees, and taxes paid on income.
Inbound Cash Flow Requirements
An investment analyst will compare outbound cash flows with inbound ones over a period of time to evaluate a company's financial condition. Inbound cash flows that are consistently greater than outbound cash flows are ideal.
There are times when a significant outbound flow occurs, such as during the construction of a new production plant or following an acquisition. Spending money is a good thing when funds are applied wisely. If all goes to plan, these investments should hopefully pay off and generate better returns for the company and its shareholders in the long-run.
Of course, there’s also a chance that costly investments backfire. Poor management of inbound cash flow could prove deadly. One of the biggest reasons companies file for bankruptcy is insufficient revenue inflows. Without inbound cash flow and sufficient money to pay the bills, no business will be able to prosper.
In the technology sector, for example, companies may attract funding and interested investors due to their products' potential sales and profits. However, if a company takes too long to live up to its hype and transform its potential into sustainable inbound cash flows, investors might soon grow tired and withdraw their support, endangering the company’s survival prospects.