Cash flow is how much money comes in and out of a business over a given period of time.
Money falling on a green background representing cash flow
On this page
What is cash flow?
The importance of cash flow
Types of cash flow
How to calculate cash flow
Cash flow example
Cash flow is essential for your business
Frequently Asked Questions About Cash Flow
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Anyone who has a personal checking account canadian cell phone numbers understands that it's not easy to keep track of the money available to pay bills. The goal of keeping an eye on a checkbook is to make sure that the money coming in exceeds the money going out. The movement of money in and out of a checking account represents cash flow.
In this sense, businesses are similar to households. They must pay attention to their cash flow to keep it positive or anticipate possible negative balances by seeking (or raising) money from other sources. Below, we will look at the different types of cash flow.
What is cash flow?
Cash flow is a record of money received (income) and money paid (outflow) during a given period. Effective cash flow management ensures that there is more inflow than outflow.
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Accounts receivable, or money owed to a company, and accounts payable, money owed by a company, are ignored in cash flow. They are recorded on another financial statement, the balance sheet, which shows a company's total assets and liabilities.
When accounts receivable are collected and accounts payable are paid, it is recorded as net cash flow.
Cash flow vs. earnings
A company's earnings and cash flow can be very different due to different accounting methods. Income statements (also called profit and loss statements) use accrual accounting, which means that sales, expenses, and profits are recorded as they are incurred in a given period, regardless of when the money is received or paid.
For example, a company that sells €10 million worth of products during a given period records the entire amount on the income statement, even if it has not yet collected the €10 million from customers.
Similarly, if expenses are €8 million, they are fully recorded because they were incurred during that period, even if payment of some of the expenses has been deferred. On the other hand, cash accounting records only the portion of sales that was collected in the period and the portion of expenses that were actually paid.
The importance of cash flow
Businesses must maintain positive cash flow or be able to anticipate potential negative cash flow by seeking (or raising) money from other sources.
Maintaining a positive cash flow ensures that you can pay bills, including wages, rent and suppliers. Without sufficient cash flow, you may struggle to meet your financial obligations, which could lead to possible insolvency.
Adequate cash flow also allows a company to invest in new opportunities: expanding into new markets, developing new products or acquiring other companies. It provides the financial flexibility needed to pursue growth strategies.
A healthy cash flow also helps companies weather unexpected problems, such as economic downturns or supply chain disruptions . It also makes companies more attractive to investors and lenders when they need external financing.
Types of cash flow
Cash flow from operations
Cash flow from operations tracks the money that comes from the production and sale of a company's goods and services. It includes cash received from the company's business operations minus cash expenses, which include the cost of goods sold and serviced, plus general and administrative expenses.
It also shows whether a company is viable and whether it is generating enough money on a regular basis to pay its bills without needing external financing.
Investment cash flow
This type of cash flow tracks money spent or received to buy and sell business assets, such as property and equipment. It also includes money spent to purchase stocks, bonds, or other securities, as well as any dividends or interest payments received from these investments.
Although investing cash flow may show a negative balance, it is not necessarily a red flag if the money is invested in income-producing assets, such as inventories, or in activities such as research and development that may generate sales and profits in the future.
Financing cash flow
Financing cash flow accounts for money a company receives from outside sources to fund its operations, including proceeds from loans or bond sales, the sale of an equity stake to an investor, or a public stock offering.
It also accounts for money spent to repay principal on loans or bonds (interest paid on loans and bonds comes from cash from operations), repurchase stock or equity interests, and pay dividends.
Financing cash flow shows how much a company relies on external financial sources, rather than cash generated internally from operations.
Unlevered free cash flow
Unlevered free cash flow is the money a company has available after it has invested in its assets, but before it has paid interest on debt.
It does not take into account the cost of any debt that may be used in the operation of a business. Debt is usually in the form of bonds or bank loans.
Unlevered free cash flow is therefore the amount of cash available to the company before subtracting the interest expense on debt. This metric is often used by analysts and investment managers.
Discounted cash flow
Discounted cash flow is a method of estimating the value of something based on how much money it is expected to generate in the future.
The primary purpose of this cash flow statement is to determine a theoretical value or price for an asset, such as an appropriate stock price for a company. Comparing the discounted cash flows generated by a company to the stock price can help an investor assess whether the company is undervalued or overvalued.
Incremental cash flow
Incremental cash flow is a way for companies to measure the profitability of individual projects or investments, helping them decide which ones to choose. Determining incremental cash flow allows companies to compare expected cash flow between projects. This helps identify which projects may be profitable and where to invest money.