Cash Flow

What is cash flow?

Cash flow is the movement of money in and out of a business over a period of time. Cash flow is a key measure of a business’s financial health. A company might show profits on paper, but it can’t pay its bills if it doesn’t have cash available.

Cash flow comes in two main forms:

• Positive Cash Flow – More money is coming in than going out (good financial health).
• Negative Cash Flow – More money is going out than coming in (trouble, especially if it continues).

Quick example: A coffee shop makes $20,000 in sales this month and has $18,000 in rent, payroll, and supplies. Since they have $2,000 left over, they have positive cash flow.

Key points

• Cash flow determines financial health. Even if a company is making a profit, it can still run into trouble if it doesn’t have enough cash on hand to cover expenses. Positive cash flow means there’s more money coming in than going out, while negative cash flow can be a warning sign of financial struggles.
• Cash flow forecasting helps businesses plan ahead. By predicting future cash flow, businesses can prepare for slow periods, avoid running out of money, and make smarter financial decisions to keep things running smoothly.

What is free cash flow?

Free Cash Flow (FCF) is how much cash a business has left over after it pays its operating expenses and capital expenditures (like buying equipment). It’s a good way to see how much money a business has to grow, pay down debt, or reward investors.

How to calculate free cash flow

To calculate free cash flow, follow these steps:

1. Find Operating Cash Flow – This number is usually on the cash flow statement.
2. Subtract Capital Expenditures – Any money spent on long-term assets like buildings or equipment.
3. The Result = Free Cash Flow – A high FCF means the business has cash to grow.

Formula for free cash flow:

FCF=Operating Cash Flow−Capital Expenditures

A retail store generates $100,000 in cash from operations and spends $20,000 on new shelving and registers. Their free cash flow is $80,000.

What is a cash flow statement?

A cash flow statement is one of the three main financial statements (The other two being the income statement and balance sheet). It shows how much cash is flowing in and out of a business over a period of time.

A typical cash flow statement is broken into three sections:

1. Operating Activities – Cash earned or spent through daily business operations.
2. Investing Activities – Money used for long-term investments (like buying property or equipment).
3. Financing Activities – Cash related to loans, stock issuance, or dividends.

Cash flow statement

Here’s a simple cash flow statement for a business over the period of one month:

 

This business has a positive cash inflow of $40,000 for the month. With this inflow, the company can pay employees, pay off debt, or invest in the company’s growth.

What is cash flow forecasting?

Cash flow forecasting is how much cash a business will have in the future. It helps companies plan ahead, avoid cash shortages, and make informed decisions. Cash flow forecasting is important because it:

1. Helps businesses predict slow seasons and plan accordingly.
2. Prevents them from running out of cash for payroll and rent.
3. Makes sure they have cash on hand for investments and growth.

If a construction company forecasts they’ll receive $200,000 in payments over the next three months and will owe $180,000 in expenses. They can adjust spending accordingly or secure short-term financing to stay on top of necessary expenses.

Cash flow is the lifeblood of any business—without it, even the most profitable companies can get into trouble. Understanding free cash flow, cash flow statements, and forecasting helps businesses make better financial decisions. By keeping an eye on cash flow trends, companies can stay ahead of financial challenges and have the necessary cash on hand needed to grow the company.