What is cash flow? What is cash flow?

What is cash flow?

Even if you are taking in plenty of sales, your business can still be cash-strapped. This happens when funds from those sales don’t reach your account in time to meet your monthly obligations. If you understand your cash flow and its purpose, you’ll manage your accounts and ensure you always have enough money to cover bills.

It refers to money incomings and outgoings representing a business’s operating activities. It is like your bank account’s mirror. It reflects your bank account over a given period. If more funds come into your bank account than go out, your cash flow is positive. And when the funds go out more than in, your cash flow is negative. Keep reading to understand its importance, types, how to prepare, an example, and more.

Importance of cash flow

Cash flow measures a business’s profitability, strength, and future outlook. Its primary purpose is to measure the inflows and outflows of money during a given period, which can be a month, three months, or a year. This information informs the business’s long and short-term planning.

Cash flow information also helps analyze the cash and working capital optimal level required in the business. Since cash flow statements offer a detailed report on the amount of money a company has on hand at a given time, business owners and investors can use this statement to:

  • Forecast the cash flow in the future and track spending to meet specific short-term goals.
  • Prioritize essential business activities.
  • Predict future cash flow by using previous data on cash outflows and inflows.
  • Reduce expenses by eliminating waste.
  • Provide a comprehensive portrait of cash outflows and spending activities.
  • Discover opportunities to create extra money channels.
  • Determine the optimum cash balance level, allowing the business to invest excess money while at the same time having enough liquidity for future needs.
  • Evaluate cash planning excellently.
  • Manage and analyze working capital excellently.
  • Forecast significant issues in advance needing crisis management.
  • Understand the optimal cash balance required to operate the company successfully.

Types of cash flow

A cash flow statement includes three major activities of your company. They include the following.

  • Operating activities: These are everyday business activities. Outflows include operating costs such as office expenses and wages. Inflows include earnings from interests, sales, and dividends.
  • Financial activities: These involve raising funds from shares or debts and repaying them. Inflows might be the cash you’ve borrowed, while outflows can be servicing debts or dividend payments.
  • Investment activities: They refer to the money lost or made through long and short-term investments. Inflows include money from selling assets like buildings, land, or equipment. Outflows involve activities such as acquiring buildings, land, or other assets.

How to analyze cash flow

Cash flow analysis involves the examination of inflows and outflows of a business to determine its working capital. It considers a given period for different activities, including financing, investment, and operation. To obtain a cash flow, analysts subtract the current liabilities from existing assets. Analysts examine every section of the business that impacts cash flow to perform an effective analysis, including:

  • Investments and financing
  • Accounts receivable
  • Inventory
  • Credit
  • Accounts payable

A business’s cash flow is revealed by the figures on the cash flow statement. The statement shows how a business spends its funds and how it receives revenues. Steps involved in the analysis include:

  • Aim for positive cash flow
  • Investigate positive cash flow
  • Analyze negative cash flow
  • Determine free cash flow
  • Calculate the operating cash flow margin

The difference between cash flow and profit

Profit is the total amount of money that remains in a business’s account from the sales revenue. Once you deduct all expenses and costs, you’ll obtain a profit. Cash flow involves the money that moves in and out of a business. It’s essential to track a profit. However, it doesn’t indicate the net amount of funds moving in and out of an account, which plays a massive role in keeping your company running well. It is a metric that ensures your company keeps going.

Do I need to report a cash flow statement?

As one of the 3 financial statements, a cash flow statement complements the income statement and balance sheet. Also, it has been part of a public company’s reporting requirements since the 1980s. Balance sheets and income statements are based on accrual accounting. The financials do not directly measure what occurs to cash over a specific time. As a result, businesses typically report or provide cash flow statements for analysts, investors, and management to review.

How to prepare a cash flow statement

Are you eager to learn how to prepare a cash flow statement? Let’s look at these simple steps of preparing it.

  • Determine the starting balance: Determine the starting cash balance and cash equivalents at the start of the accounting period.
  • Calculate the cash flow from operating activities: Use either direct or indirect methods to calculate the cash flow from operating activities.
  • Calculate the cash flow from investing activities: You’ll obtain cash flow statement details related to the purchasing and selling long-term assets such as properties, equipment, and facilities.
  • Calculate the cash flow from financing activities: This involves cash flows from equity and debt financing. Cash flows related to raising and paying back debts to creditors and investors.
  • Determine the ending balance: Once you’ve accounted for the three major business activity types, you can determine the ending balance of cash and money equivalents at the end of the reporting period.

Cash flow statement example

Let’s look at an example of a cash flow statement. This cash flow statement is for Company B for the reporting period ended September 28, 2021.

Company B

Statement of Cash Flow

Financial Year Ended September 28, 2021

Cash Flow From Operating Activities

Net Earnings




Decrease in Accounts Receivable


Increase in Accounts Payable


Increase in Taxes Payable


Increase in Inventory


Net Cash From Operations


Cash Flow From Investing



Cash Flow From Financing

Notes Payable


Financial Year Ended September 28, 2022


Manage your financial processes with WorkhyBooks

Whether you own a company or planning to create one, Workhy offers a range of services that can help you. If you want to start a business, Workhy can help you as it provides online company formation services in the UK, US, and EU. You don’t need to travel or reside in the country where your business will operate. Also, you can manage all financial processes of your business online with WorkhyBooks, one of the most user-friendly and efficient bookkeeping software solutions for small businesses.

New call-to-action

Leave a Reply

Your email address will not be published. Required fields are marked *