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What Is a Cash Flow Statement (CFS)?

• Using the Cash Flow Statement

How Cash Flow Is Calculated

• Limitations
• Income Statement & Balance Sheet

The Bottom Line

• Corporate Finance
• Financial statements: Balance, income, cash flow, and equity

Cash Flow Statement: What It Is and Examples

Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas' experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

A cash flow statement tracks the inflow and outflow of cash, providing insights into a company's financial health and operational efficiency.

The CFS measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses. As one of the three main financial statements, the CFS complements the balance sheet and the income statement. In this article, we’ll show you how the CFS is structured and how you can use it when analyzing a company.

Key Takeaways

• A cash flow statement summarizes the amount of cash and cash equivalents entering and leaving a company. 
• The CFS highlights a company's cash management, including how well it generates cash. 
• This financial statement complements the balance sheet and the income statement. 
• The main components of the CFS are cash from three areas: Operating activities, investing activities, and financing activities.
• The two methods of calculating cash flow are the direct method and the indirect method.

How the Cash Flow Statement Is Used

The cash flow statement paints a picture as to how a company’s operations are running, where its money comes from, and how money is being spent. Also known as the statement of cash flows, the CFS helps its creditors determine how much cash is available (referred to as  liquidity ) for the company to fund its operating expenses and pay down its debts. The CFS is equally important to investors because it tells them whether a company is on solid financial ground. As such, they can use the statement to make better, more informed decisions about their investments.

Structure of the Cash Flow Statement

The main components of the cash flow statement are:

• Cash flow from operating activities
• Cash flow from investing activities
• Cash flow from financing activities
• Disclosure of non-cash activities, which is sometimes included when prepared under generally accepted accounting principles (GAAP) .

Cash From Operating Activities

The operating activities on the CFS include any sources and uses of cash from business activities. In other words, it reflects how much cash is generated from a company’s products or services.

These operating activities might include:

• Receipts from sales of goods and services
• Interest payments
• Income tax payments
• Payments made to suppliers of goods and services used in production
• Salary and wage payments to employees
• Rent payments
• Any other type of operating expenses

In the case of a trading portfolio or an investment company, receipts from the sale of loans, debt, or equity instruments are also included because it is a business activity.

Changes made in cash, accounts receivable, depreciation, inventory, and accounts payable are generally reflected in cash from operations.

Cash From Investing Activities

Investing activities include any sources and uses of cash from a company’s investments. Purchases or sales of assets, loans made to vendors or received from customers, or any payments related to mergers and acquisitions (M&A) are included in this category. In short, changes in equipment, assets, or investments relate to cash from investing.

Changes in cash from investing are usually considered cash-out items because cash is used to buy new equipment, buildings, or short-term assets such as marketable securities. But when a company divests an asset, the transaction is considered cash-in for calculating cash from investing.

Cash From Financing Activities

Cash from financing activities includes the sources of cash from investors and banks, as well as the way cash is paid to shareholders. This includes any dividends, payments for stock repurchases , and repayment of debt principal (loans) that are made by the company.

Changes in cash from financing are cash-in when capital is raised and cash-out when dividends are paid. Thus, if a company issues a bond to the public, the company receives cash financing. However, when interest is paid to bondholders , the company is reducing its cash. And remember, although interest is a cash-out expense, it is reported as an operating activity—not a financing activity.

There are two methods of calculating cash flow: the direct method and the indirect method.

Direct Cash Flow Method

The   direct method   adds up all of the cash payments and receipts, including cash paid to suppliers, cash receipts from customers, and cash paid out in salaries. This method of CFS is easier for very small businesses that use the cash basis accounting method.

These figures can also be calculated by using the beginning and ending balances of a variety of asset and liability accounts and examining the net decrease or increase in the accounts. It is presented in a straightforward manner.

Most companies use the accrual basis accounting method. In these cases, revenue is recognized when it is earned rather than when it is received. This causes a disconnect between net income and actual cash flow because not all transactions in net income on the income statement involve actual cash items. Therefore, certain items must be reevaluated when calculating cash flow from operations.

Indirect Cash Flow Method

With the  indirect method , cash flow is calculated by adjusting net income by adding or subtracting differences resulting from non-cash transactions. Non-cash items show up in the changes to a company’s assets and liabilities on the balance sheet from one period to the next. Therefore, the accountant will identify any increases and decreases to asset and liability accounts that need to be added back to or removed from the net income figure, in order to identify an accurate cash inflow or outflow.

Changes in accounts receivable (AR) on the balance sheet from one accounting period to the next must be reflected in cash flow:

• If AR decreases, more cash may have entered the company from customers paying off their credit accounts—the amount by which AR has decreased is then added to net earnings.
• An increase in AR must be deducted from net earnings because, although the amounts represented in AR are in revenue, they are not cash.

What about changes in a company's inventory ? Here's how they are accounted for on the CFS:

• An increase in inventory signals that a company spent more money on raw materials. Using cash means the increase in the inventory's value is deducted from net earnings.
• A decrease in inventory would be added to net earnings. Credit purchases are reflected by an increase in accounts payable on the balance sheet, and the amount of the increase from one year to the next is added to net earnings.

The same logic holds true for taxes payable, salaries, and prepaid insurance . If something has been paid off, then the difference in the value owed from one year to the next has to be subtracted from net income. If there is an amount that is still owed, then any differences will have to be added to net earnings.

Limitations of the Cash Flow Statement

Negative cash flow should not automatically raise a red flag without further analysis. Poor cash flow is sometimes the result of a company’s decision to expand its business at a certain point in time, which would be a good thing for the future.

Analyzing changes in cash flow from one period to the next gives the investor a better idea of how the company is performing, and whether a company may be on the brink of bankruptcy or success. The CFS should also be considered in unison with the other two financial statements (see below).

The indirect cash flow method allows for a reconciliation between two other financial statements: the income statement and balance sheet.

Cash Flow Statement vs. Income Statement vs. Balance Sheet

The cash flow statement measures the performance of a company over a period of time. But it is not as easily manipulated by the timing of non-cash transactions. As noted above, the CFS can be derived from the income statement and the balance sheet . Net earnings from the income statement are the figure from which the information on the CFS is deduced. But they only factor into determining the operating activities section of the CFS. As such, net earnings have nothing to do with the investing or financial activities sections of the CFS.

The income statement includes depreciation expense, which doesn't actually have an associated cash outflow. It is simply an allocation of the cost of an asset over its useful life. A company has some leeway to choose its depreciation method , which modifies the depreciation expense reported on the income statement. The CFS, on the other hand, is a measure of true inflows and outflows that cannot be as easily manipulated.

As for the balance sheet, the net cash flow reported on the CFS should equal the net change in the various line items reported on the balance sheet. This excludes cash and cash equivalents and non-cash accounts, such as accumulated depreciation and accumulated amortization. For example, if you calculate cash flow for 2019, make sure you use 2018 and 2019 balance sheets.

The CFS is distinct from the income statement and the balance sheet because it does not include the amount of future incoming and outgoing cash that has been recorded as revenues and expenses . Therefore, cash is not the same as net income , which includes cash sales as well as sales made on credit on the income statements.

Example of a Cash Flow Statement

Below is an example of a cash flow statement: 

Investopedia / Sabrina Jiang

From this CFS, we can see that the net cash flow for the 2017 fiscal year was $1,522,000. The bulk of the positive cash flow stems from cash earned from operations, which is a good sign for investors. It means that core operations are generating business and that there is enough money to buy new inventory.

The purchasing of new equipment shows that the company has the cash to invest in itself. Finally, the amount of cash available to the company should ease investors’ minds regarding the notes payable, as cash is plentiful to cover that future loan expense.

What Is the Difference Between Direct and Indirect Cash Flow Statements?

The difference lies in how the cash inflows and outflows are determined.

Using the direct method , actual cash inflows and outflows are known amounts. The cash flow statement is reported in a straightforward manner, using cash payments and receipts.

Using the indirect method , actual cash inflows and outflows do not have to be known. The indirect method begins with net income or loss from the income statement, then modifies the figure using balance sheet account increases and decreases, to compute implicit cash inflows and outflows.

Is the Indirect Method of the Cash Flow Statement Better Than the Direct Method?

Neither is necessarily better or worse. However, the indirect method also provides a means of reconciling items on the balance sheet to the net income on the income statement. As an accountant prepares the CFS using the indirect method, they can identify increases and decreases in the balance sheet that are the result of non-cash transactions.

It is useful to see the impact and relationship that accounts on the balance sheet have to the net income on the income statement, and it can provide a better understanding of the financial statements as a whole.

What Is Included in Cash and Cash Equivalents?

Cash and cash equivalents are consolidated into a single line item on a company's balance sheet. It reports the value of a business’s assets that are currently cash or can be converted into cash within a short period of time, commonly 90 days. Cash and cash equivalents include currency, petty cash, bank accounts, and other highly liquid, short-term investments. Examples of cash equivalents include commercial paper, Treasury bills, and short-term government bonds with a maturity of three months or less.

A cash flow statement is a valuable measure of strength, profitability, and the long-term future outlook of a company. The CFS can help determine whether a company has enough liquidity or cash to pay its expenses. A company can use a CFS to predict future cash flow, which helps with budgeting matters.

For investors, the CFS reflects a company’s financial health , since typically the more cash that’s available for business operations, the better. However, this is not a rigid rule. Sometimes, a negative cash flow results from a company’s growth strategy in the form of expanding its operations.

By studying the CFS, an investor can get a clear picture of how much cash a company generates and gain a solid understanding of the financial well-being of a company.

Financial Accounting Standards Board. " Summary of Statement No. 95 ."

• Accounting Explained With Brief History and Modern Job Requirements 1 of 51
• What Is the Accounting Equation, and How Do You Calculate It? 2 of 51
• What Is an Asset? Definition, Types, and Examples 3 of 51
• Liability: Definition, Types, Example, and Assets vs. Liabilities 4 of 51
• Equity Meaning: How It Works and How to Calculate It 5 of 51
• Revenue Definition, Formula, Calculation, and Examples 6 of 51
• Expense: Definition, Types, and How Expenses Are Recorded 7 of 51
• Current Assets vs. Noncurrent Assets: What's the Difference? 8 of 51
• What Is Accounting Theory in Financial Reporting? 9 of 51
• Accounting Principles Explained: How They Work, GAAP, IFRS 10 of 51
• Accounting Standard Definition: How It Works 11 of 51
• Accounting Convention: Definition, Methods, and Applications 12 of 51
• What Are Accounting Policies and How Are They Used? With Examples 13 of 51
• How Are Principles-Based and Rules-Based Accounting Different? 14 of 51
• What Are Accounting Methods? Definition, Types, and Example 15 of 51
• What Is Accrual Accounting, and How Does It Work? 16 of 51
• Cash Accounting Definition, Example & Limitations 17 of 51
• Accrual Accounting vs. Cash Basis Accounting: What's the Difference? 18 of 51
• Financial Accounting Standards Board (FASB): Definition and How It Works 19 of 51
• Generally Accepted Accounting Principles (GAAP): Definition, Standards and Rules 20 of 51
• What Are International Financial Reporting Standards (IFRS)? 21 of 51
• IFRS vs. GAAP: What's the Difference? 22 of 51
• How Does US Accounting Differ From International Accounting? 23 of 51
• Cash Flow Statement: What It Is and Examples 24 of 51
• Breaking Down The Balance Sheet 25 of 51
• Income Statement: How to Read and Use It 26 of 51
• What Does an Accountant Do? 27 of 51
• Financial Accounting Meaning, Principles, and Why It Matters 28 of 51
• How Does Financial Accounting Help Decision-Making? 29 of 51
• Corporate Finance Definition and Activities 30 of 51
• How Financial Accounting Differs From Managerial Accounting 31 of 51
• Cost Accounting: Definition and Types With Examples 32 of 51
• Certified Public Accountant: What the CPA Credential Means 33 of 51
• What Is a Chartered Accountant (CA) and What Do They Do? 34 of 51
• Accountant vs. Financial Planner: What's the Difference? 35 of 51
• Auditor: What It Is, 4 Types, and Qualifications 36 of 51
• Audit: What It Means in Finance and Accounting, and 3 Main Types 37 of 51
• Tax Accounting: Definition, Types, vs. Financial Accounting 38 of 51
• Forensic Accounting: What It Is, How It's Used 39 of 51
• Chart of Accounts (COA) Definition, How It Works, and Example 40 of 51
• What Is a Journal in Accounting, Investing, and Trading? 41 of 51
• Double Entry: What It Means in Accounting and How It's Used 42 of 51
• Debit: Definition and Relationship to Credit 43 of 51
• Credit: What It Is and How It Works 44 of 51
• Closing Entry 45 of 51
• What Is an Invoice? It's Parts and Why They Are Important 46 of 51
• 6 Components of an Accounting Information System (AIS) 47 of 51
• Inventory Accounting: Definition, How It Works, Advantages 48 of 51
• Last In, First Out (LIFO): The Inventory Cost Method Explained 49 of 51
• The FIFO Method: First In, First Out 50 of 51
• Average Cost Method: Definition and Formula with Example 51 of 51

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Cash Flow Statement: Explanation and Example

Bryce Warnes

Reviewed by

Janet Berry-Johnson, CPA

February 28, 2024

This article is Tax Professional approved

A cash flow statement tells you how much cash is entering and leaving your business in a given period. Along with balance sheets and income statements, it’s one of the three most important financial statements for managing your small business accounting and making sure you have enough cash to keep operating.

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Cash flow statements are also required by certain financial reporting standards.

What makes a cash flow statement different from your balance sheet is that a balance sheet shows the assets and liabilities your business owns (assets) and owes (liabilities). The cash flow statement simply shows the inflows and outflows of cash from your business over a specific period of time, usually a month.

Let's take a closer look at what cash flow statements do for your business, and why they're so important. Then, we'll walk through an example cash flow statement, and show you how to create your own using a template.

First, let’s take a closer look at what cash flow statements do for your business, and why they’re so important. Then, we’ll walk through an example cash flow statement, and show you how to create your own using a template.

What is the purpose of a cash flow statement?

A cash flow statement is a regular financial statement telling you how much cash you have on hand for a specific period.

While income statements are excellent for showing you how much money you’ve spent and earned, they don’t necessarily tell you how much cash you have on hand for a specific period of time.

Cash flow statement vs. balance sheet

A balance sheet shows you your business’s assets, liabilities, and owner’s equity at a specific moment in time—typically at the end of a quarter or a year.

What it doesn’t show is revenue or expenses, or any of the business’s other cash activities that impact your company’s day-to-day health. Those activities are recorded on your cash flow statement.

Cash flow statement vs. income statement

Using only an income statement to track your cash flow can lead to serious problems—and here’s why.

If you use accrual basis accounting, income and expenses are recorded when they are earned or incurred—not when the money actually leaves or enters your bank accounts. (The cash accounting method only records money once you have it on hand. Learn more about the cash vs. accrual basis systems of accounting.)

So, even if you see income reported on your income statement, you may not have the cash from that income on hand. The cash flow statement makes adjustments to the information recorded on your income statement, so you see your net cash flow—the precise amount of cash you have on hand for that time period.

For example, depreciation is recorded as a monthly expense. However, you've already paid cash for the asset you're depreciating; you record it on a monthly basis in order to see how much it costs you to have the asset each month over the course of its useful life. But cash isn't literally leaving your bank account every month.

The cash flow statement takes that monthly expense and reverses it—so you see how much cash you have on hand in reality, not how much you've spent in theory.

Why do you need cash flow statements?

So long as you use accrual accounting, cash flow statements are an essential part of financial analysis for three reasons:

• They show your liquidity . That means you know exactly how much operating cash flow you have in case you need to use it. So you know what you can afford, and what you can’t.
• They show you changes in assets, liabilities, and equity in the forms of cash outflows, cash inflows, and cash being held. Those three categories are the core of your business accounting. Together, they form the accounting equation that lets you measure your performance.
• They let you predict future cash flows . You can use cash flow statements to create cash flow projections , so you can plan for how much liquidity your business will have in the future. That’s important for making long-term business plans.

On top of that, if you plan on securing a loan or line of credit, you’ll need up-to-date cash flow statements to apply.

Negative cash flow vs. positive cash flow

When your cash flow statement shows a negative number at the bottom, that means you lost cash during the accounting period—you have negative cash flow. It’s important to remember that long-term, negative cash flow isn’t always a bad thing. For example, early stage businesses need to track their burn rate as they try to become profitable.

When you have a positive number at the bottom of your statement, you’ve got positive cash flow for the month. Keep in mind, positive cash flow isn’t always a good thing in the long term. While it gives you more liquidity now, there are negative reasons you may have that money—for instance, by taking on a large loan to bail out your failing business. Positive cash flow isn’t always positive overall.

Where do cash flow statements come from?

If you do your own bookkeeping in Excel , you can calculate cash flow statements each month based on the information on your income statements and balance sheets. If you use accounting software , it can create cash flow statements based on the information you’ve already entered in the general ledger .

Keep in mind, with both those methods, your cash flow statement is only accurate so long as the rest of your bookkeeping is accurate too. The most surefire way to know how much working capital you have is to hire a bookkeeper . They’ll make sure everything adds up, so your cash flow statement always gives you an accurate picture of your company’s financial health.

Statements of cash flow using the direct and indirect methods

In order to figure out your company’s cash flow, you can take one of two routes: The direct method, and the indirect method. While generally accepted accounting principles (US GAAP) approve both, the indirect method is typically preferred by small businesses.

The direct method of calculating cash flow

Using the direct method, you keep a record of cash as it enters and leaves your business, then use that information at the end of the month to prepare a statement of cash flow.

The direct method takes more legwork and organization than the indirect method—you need to produce and track cash receipts for every cash transaction. For that reason, smaller businesses typically prefer the indirect method.

Also worth mentioning: Even if you record cash flows in real time with the direct method, you’ll also need to use the indirect method to reconcile your statement of cash flows with your income statement. So, you can usually expect the direct method to take longer than the indirect method.

The indirect method of calculating cash flow

With the indirect method, you look at the transactions recorded on your income statement, then reverse some of them in order to see your working capital. You’re selectively backtracking your income statement in order to eliminate transactions that don’t show the movement of cash.

Since it’s simpler than the direct method, many small businesses prefer this approach. Also, when using the indirect method, you do not have to go back and reconcile your statements with the direct method.

In our examples below, we’ll use the indirect method of calculating cash flow.

How the cash flow statement works with the income statement and the balance sheet

You use information from your income statement and your balance sheet to create your cash flow statement. The income statement lets you know how money entered and left your business, while the balance sheet shows how those transactions affect different accounts—like accounts receivable , inventory, and accounts payable .

So, the process of producing financial statements for your business goes:

Income Statement + Balance Sheet = Cash Flow Statement

Example of a cash flow statement

Now that we’ve got a sense of what a statement of cash flows does and, broadly, how it’s created, let’s check out an example.

There’s a fair amount to unpack here. But here’s what you need to know to get a rough idea of what this cash flow statement is doing.

• Red dollar amounts decrease cash. For instance, when we see ($30,000) next to “Increase in inventory,” it means inventory increased by $30,000 on the balance sheet. We bought $30,000 worth of inventory, so our cash balance decreased by that amount.
• Black dollar amounts increase cash. For example, when we see $20,000 next to “Depreciation,” that $20,000 is an expense on the income statement, but depreciation doesn’t actually decrease cash. So we add it back to net income.

You’ll also notice that the statement of cash flows is broken down into three sections—Cash Flow from Operating Activities, Cash Flow from Investing Activities, and Cash Flow from Financing Activities. Let’s look at what each section of the cash flow statement does.

The three sections of a cash flow statement

These three activities sections of the statement of cash flows designate the different ways cash can enter and leave your business.

• Cash Flow from Operating Activities is cash earned or spent in the course of regular business activity—the main way your business makes money, by selling products or services.
• Cash Flow from Investing Activities is cash earned or spent from investments your company makes, such as purchasing equipment or investing in other companies.
• Cash Flow from Financing Activities is cash earned or spent in the course of financing your company with loans, lines of credit, or owner’s equity .

Using the cash flow statement example above, here’s a more detailed look at what each section does, and what it means for your business.

Cash Flow from Operating Activities

For most small businesses, Operating Activities will include most of your cash flow. That’s because operating activities are what you do to get revenue. If you run a pizza shop, it’s the cash you spend on ingredients and labor, and the cash you earn from selling pies. If you’re a registered massage therapist , Operating Activities is where you see your earned cash from giving massages, and the cash you spend on rent and utilities.

Cash Flow from Operating Activities in our example

Taking another look at this section, let’s break it down line by line.

Net income is the total income, after expenses, for the month. We get this from the income statement.

Depreciation is recorded as a $20,000 expense on the income statement. Here, it’s listed as income. Since no cash actually left our hands, we’re adding that $20,000 back to cash on hand.

Increase in Accounts Payable is recorded as a $10,000 expense on the income statement. That’s money we owe—in this case, let’s say it’s paying contractors to build a new goat pen. Since we owe the money, but haven’t actually paid it, we add that amount back to the cash on hand.

Increase in Accounts Receivable is recorded as a $20,000 growth in accounts receivable on the income statement. That’s money we’ve charged clients—but we haven’t actually been paid yet. Even though the money we’ve charged is an asset, it isn’t cold hard cash. So we deduct that $20,000 from cash on hand.

Increase in Inventory is recorded as a $30,000 growth in inventory on the balance sheet. That means we’ve paid $30,000 cash to get $30,000 worth of inventory. Inventory is an asset, but it isn’t cash—we can’t spend it. So we deduct the $30,000 from cash on hand.

Net Cash from Operating Activities , after we’ve made all the changes above, comes out to $40,000.

Meaning, even though our business earned $60,000 in October (as reported on our income statement), we only actually received $40,000 in cash from operating activities.

Cash Flow from Investing Activities

This section covers investments your company has made—by purchasing equipment, real estate, land, or easily liquidated financial products referred to as “cash equivalents.” When you spend cash on an investment, that cash gets converted to an asset of equal value.

If you buy a $10,000 mower for your landscaping company, you lose $10,000 cash and get a $10,000 mower. If you buy a $140,000 retail space, you lose $140,000 cash and get a $140,000 retail space.

Under Cash Flow from Investing Activities, we reverse those investments, removing the cash on hand. They have cash value, but they aren’t the same as cash—and the only asset we’re interested in, in this context, is currency.

For small businesses, Cash Flow from Investing Activities usually won’t make up the majority of cash flow for your company. But it still needs to be reconciled, since it affects your working capital.

Cash Flow from Investing Activities in our example

Purchase of Equipment is recorded as a new $5,000 asset on our income statement. It’s an asset, not cash—so, with ($5,000) on the cash flow statement, we deduct $5,000 from cash on hand.

Cash Flow from Financing Activities

This section covers revenue earned or assets spent on Financing Activities. When you pay off part of your loan or line of credit, money leaves your bank accounts. When you tap your line of credit, get a loan, or bring on a new investor, you receive cash in your accounts.

Cash Flow from Financing Activities in our example

Notes payable is recorded as a $7,500 liability on the balance sheet. Since we received proceeds from the loan, we record it as a $7,500 increase to cash on hand.

Cash flow for the month

At the bottom of our cash flow statement, we see our total cash flow for the month: $42,500.

Even though our net income listed at the top of the cash flow statement (and taken from our income statement) was $60,000, we only received $42,500.

That’s $42,500 we can spend right now, if need be. If we only looked at our net income, we might believe we had $60,000 cash on hand. In that case, we wouldn’t truly know what we had to work with—and we’d run the risk of overspending, budgeting incorrectly, or misrepresenting our liquidity to loan officers or business partners.

Using a cash flow statement template

Do your own bookkeeping using spreadsheets? In that case, using a cash flow statement template will save you time and energy.

Our Free Cash Flow Statement Template is easy to download and simple to use.

How to track cash flow using the indirect method

Four simple rules to remember as you create your cash flow statement:

• Transactions that show an increase in assets result in a decrease in cash flow.
• Transactions that show a decrease in assets result in an increase in cash flow.
• Transactions that show an increase in liabilities result in an increase in cash flow.
• Transactions that show a decrease in liabilities result in a decrease in cash flow.

If you’ve already gone through the example statement above and you feel like you have a pretty good grasp of how to create a cash flow statement, go ahead and start experimenting with our Free Income Statement Template and Free Cash Flow Template.

But if you’d like to get a clearer idea of how it all works, this quick example should help.

Creating a cash flow statement from your income statement and balance sheet

Let’s say we’re creating a cash flow statement for Greg’s Popsicle Stand for July 2019.

Our income statement looks like this:

Note: For the sake of simplicity, this example omits income tax.

And our balance sheet looks like this:

Remember the four rules for converting information from an income statement to a cash flow statement? Let’s use them to create our cash flow statement.

Our net income for the month on the income statement is $3,500 — that stays the same, since it’s a total amount, not a specific account.

Additions to Cash

• Depreciation is included in expenses for the month, but it didn’t actually impact cash, so we add that back to cash.
• Accounts payable increased by $5,500. That’s a liability on the balance sheet, but the cash wasn’t actually paid out for those expenses, so we add them back to cash as well.

Decreases to Cash

• Accounts receivable increased by $4,000. That’s an asset recorded on the balance sheet, but we didn’t actually receive the cash, so we remove it from cash on hand.

Our net cash flow from operating activities adds up to $5,500.

Greg purchased $5,000 of equipment during this accounting period, so he spent $5,000 of cash on investing activities.

Greg didn’t invest any additional money in the business, take out a new loan, or make cash payments towards any existing debt during this accounting period, so there are no cash flows from financing activities.

Cash Flow for Month Ending July 31, 2019 is $500, once we crunch all the numbers. Greg started the accounting period with $5,500 in cash. After accounting for all of the additions and subtractions to cash, he has $6,000 at the end of the period.

Cash flow statements are powerful financial reports, so long as they’re used in tandem with income statements and balance sheets. See how all three financial statements work together.

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Cash Flow Statement (CFS)

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on March 27, 2023

Get Any Financial Question Answered

Table of contents, what is a cash flow statement (cfs).

A cash flow statement (CFS) is a financial statement that captures how much cash is generated and utilized by a company or business in a specific time period.

By looking at the cash flow statement, one can see whether the company has sufficient cash flowing in to pay its debts, fund its operations, and return money to shareholders via dividends or stock buybacks.

CFS bridges the income statement and balance sheet because it shows how money moves in and out of the business via three main channels: operating, investing, and financing activities.

It produces what is called the net cash flow by breaking down where the changes in the beginning and ending balances came from.

The cash flow statement is focused on the cash accounting method, which means that business transactions reflect in the financial statement when the cash flows into or out of the business or when actual payments are received or distributed.

Structure of the Cash Flow Statement

The Cash Flow Statement has three main sections: cash flows from operating activities, investing activities, and financing activities.

Together, these different sections can help investors and analysts determine the value of a company as a whole. Let us learn more about them below.

Cash Flow From Operating Activities (CFO)

This section covers cash transactions from all of a business’ operational activities, such as receipts from sales of goods and services, wage payments to employees, payments to suppliers, interest payments, and tax payments.

For an investment company or a trading portfolio, equity instruments or receipts for the sale of debt and loans are also included because it is counted as a business activity.

It can be considered as a cash version of the net income of a company since it starts with the net income or loss, then adds or subtracts from that amount to produce a net cash flow figure.

Items that are added or subtracted include accounts receivables, accounts payables, amortization, depreciation, and prepaid items recorded as revenue or expenses in the income statement because they are non-cash.

Cash Flow From Investing Activities (CFI)

This section is the result of investment gains and losses. It includes cash spent on property, plant, and equipment. Analysts look in this section to see if there are any changes in capital expenditures (CapEx) .

Companies could generate cash flow from investing by selling equipment, property, or assets . Loans given to vendors or received from customers, as well as any payments associated with mergers and acquisitions (M&A) , are also included in this section.

Cash-out items are those changes caused by the purchase of new equipment, buildings, or marketable securities. Cash-in items are when a company divests an asset.

Cash Flow From Financing Activities (CFF)

This section records the cash flow between the company, its shareholders, investors, and creditors. It provides an overview of cash utilized in business financing.

Transactions in CFF typically involve debt, equity , dividends , and stock repurchases.

Cash-out transactions in CFF happen when dividends are paid, while cash-in transactions occur when the capital is raised.

Thus, when a company issues a bond to the public, the company receives cash financing. In contrast, when interest is given to bondholders, the company decreases its cash.

How Cash Flow Is Calculated

There are two accepted methods in calculating cash flow: direct and indirect.

Direct Cash Flow Method

This method measures only the cash received, typically from customers, and the cash payments made, such as to suppliers. These inflows and outflows are then calculated to arrive at the net cash flow.

This method of calculating cash flow takes more time since you need to track payments and receipts for every cash transaction.

Figures used in this method are presented in a straightforward manner. They can be calculated using the beginning and ending balances of various asset and liability accounts and assessing their net decrease or increase.

Indirect Cash Flow Method

Using this method, cash flow is calculated through modifying the net income by adding or subtracting differences that result from non-cash transactions. This is done in order to come up with an accurate cash inflow or outflow.

Instead of presenting transactional data like the direct method, the calculation begins with the net income figure found in the income statement of the company and makes adjustments to undo the impact of accruals that were made during the accounting period.

The major differences between the two methods are outlined in the table below:

Examples of a Cash Flow Statement

To present a clearer picture of the two methods, there are some examples presented below.

Calculated Using the Direct Cash Flow Method

An example of the cash flow statement using the direct method for a hypothetical company is shown here:

In the above example, the business has net cash of $50,049 from its operating activities and $11,821 from its investing activities. It has a net outflow of cash, which amounts to $7,648 from its financing activities.

As a result, the business has a total of $126,475 in net cash flow at the end of the year.

Calculated Using the Indirect Cash Flow Method

This is another example of a cash flow statement of Nike, Inc. using the indirect method for the fiscal year ending May 31, 2021.

This cash flow statement shows that Nike started the year with approximately $8.3 million in cash and equivalents.

The business brought in $6.65 million through its operating activities. Meanwhile, it spent approximately $3.8 million in investment activities, and a further $1.45 million in financing activities.

The changes in the value of cash balance due to fluctuations in foreign currency exchange rates amount to $143 million.

Consequently, the business ended the year with a positive cash flow of $1.5 million and total cash of $9.88 million.

Importance of a Cash Flow Statement

The CFS is one of the most important financial statements for a business. Cash is the lifeblood of any organization, and a company needs to have a good handle on its cash inflows and outflows in order to stay afloat.

There are several reasons why the cash flow statement is so important:

Provides an Overview of Spending

The cash flow statement presents a good overview of the company’s spending because it captures all the cash that comes in and goes out.

This information is helpful so that management can make decisions on where to cut costs. It also helps investors and creditors assess the financial health of the company.

Maintains an Optimum Cash Balance

Another important function of the cash flow statement is that it helps a business maintain an optimum cash balance.

Management can use the information in the statement to decide when to invest or pay off debts because it shows how much cash is available at any given time.

Focuses on Generating Cash

The cash flow statement also encourages management to focus on generating cash.

This is because when a company knows where its cash is going, it can take steps to make sure that more cash is coming in than going out.

Useful as a Basis for Short-Term Planning

A cash flow statement is an important measurement because it provides information that can be used to make short-term plans.

For instance, if a company realizes that it will have a cash shortfall in the next month, it can take steps to ensure enough funds are available.

Limitations of the Cash Flow Statement

The Cash Flow Statement has a few limitations:

Inability to Compare Similar Industries

The cash flow statement is useful when analyzing changes in cash flow from one period to the next as it gives investors an idea of how the company is performing.

However, it does not measure the efficiency of the business in comparison to a similar industry. This is because terms of sales and purchases may differ from company to company.

Other companies may also have a higher capital investment which means they have more cash outflow rather than cash inflow.

Does not Replace the Income Statement

The cash flow statement does not replace the income statement as it only focuses on changes in cash. In contrast, the income statement is important as it provides information about the profitability of a company.

Lack of Focus on Profitability

The cash flow statement will not present the net income of a company for the accounting period as it does not include non-cash items which are considered by the income statement.

Therefore, it does not evaluate the profitability of a company as it does not consider all costs or revenues.

Cash Flow Statement vs Income Statement vs Balance Sheet

Three financial statements provide insights into the financial performance of a company and potential issues that may need to be addressed: the income statement, balance sheet , and cash flow statement.

These three documents offer unique information that serves as the foundation of corporate accounting.

Below is a comparison between cash flow statement, income statement, and balance sheet:

Final Thoughts

The cash flow statement is an essential financial statement for any business as it provides critical information regarding cash inflows and outflows of the company.

It helps businesses to make crucial decisions about spending, investments , and credit.

Cash flow statements display the beginning and ending cash balances over a specific time period and points out where the changes came from (i.e operating activities, investing activities, and financing activities).

This information allows businesses to forecast future cash needs, make informed investment decisions, and track actual performance against budgeted targets.

However, the cash flow statement also has a few limitations, such as its inability to compare similar industries and its lack of focus on profitability.

Therefore, it should always be used in unison with the income statement and balance sheet to get a complete financial overview of the company.

Cash Flow Statement (CFS) FAQs

What are the implications of positive and negative cash flows.

Positive cash flow reveals that more cash is coming into the company than going out. This is a good sign as it tells that the company is able to pay off its debts and obligations. Negative cash flow typically shows that more cash is leaving the company than coming in, which can be a reason for concern as the company may not be able to meet its financial obligations in the future. However, this could also mean that a company is investing or expanding which requires it to spend some of its funds.

What is the difference between direct and indirect cash flow statements?

Direct cash flow statements show the actual cash inflows and outflows from each operating, investing, and financing activity. While the indirect cash flow method makes adjustments on net income to account for accrual transactions.

What is the importance of cash flow statements?

Cash flow statements are important as they provide critical information about the cash inflows and outflows of the company. This information is important in making crucial decisions about spending, investments, and credit.

What are the main components of a cash flow statement?

The main components of a cash flow statement are cash flows from operating activities, investing activities, and financing activities.

How are cash flow and free cash flow different?

Cash flow is the total amount of cash that is flowing in and out of the company. Free cash flow is the available cash after subtracting capital expenditures.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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Quickonomics

Given the substantial amount of requested text and the comprehensive nature of economics, I’ll focus on developing a detailed glossary post about “Cash Flow” within the constraints provided.

Definition of Cash Flow

Cash flow refers to the net amount of cash and cash-equivalents being transferred into and out of a business. At its core, it represents the company’s financial health, indicating how well the company generates cash to pay its debt obligations and fund its operating expenses. Understanding cash flow is crucial for assessing the liquidity, flexibility, and overall financial performance of a business.

Types of Cash Flow

There are primarily three types of cash flows:

• Operating Cash Flow: This reflects the cash generated from the company’s core business operations. It involves cash transactions related to non-financial activities, such as selling products and services and paying for salaries, rent, and supplies.
• Investing Cash Flow: This indicates the cash used for and generated from investment activities, including purchases or sales of assets like property, plant, and equipment (PPE), securities, and other investments.
• Financing Cash Flow: It shows the cash moving between a company and its owners, investors, and creditors. This includes issuing and repaying equity and debt, as well as dividend payments.

Importance of Cash Flow

Cash flow is a critical indicator of a company’s financial health for several reasons:

• Liquidity: It provides an insight into a company’s liquidity and its ability to cover its debts and operational costs without needing additional financial input.
• Solvency: Positive cash flow indicates that a company can meet its short-term liabilities with its short-term assets, which is an essential aspect of solvency.
• Flexibility: A healthy cash flow grants a company more flexibility in making business decisions, such as pursuing new investments or tackling unexpected expenses.
• Valuation: For investors and analysts, a company’s cash flow is a key determinant of its value and future growth prospects.

Frequently Asked Questions (FAQ)

What is the difference between cash flow and profit.

While cash flow denotes the net balance of cash moving in and out of a business during a specific period, profit refers to the residual earnings after all expenses are deducted from revenues. A company can be profitable yet still have cash flow problems if revenues have not been collected in cash.

How can a company improve its cash flow?

Companies can improve cash flow by managing their receivables and payables more efficiently, optimizing inventory levels, renegotiating terms with lenders and vendors, and considering pricing strategies to increase sales volumes or margins.

Why might a company have a negative cash flow?

Negative cash flow can occur due to various reasons, including high levels of investment in assets, significant inventory purchases, expansion efforts, or periods of low sales. Though not always indicative of poor financial health, sustained negative cash flow can lead to solvency issues.

How is cash flow reported?

Cash flow is reported in a statement of cash flows, a financial document that shows how changes in the balance sheet accounts and income affect cash and cash equivalents. The statement breaks down the cash flow into operating, investing, and financing activities.

This overview provides a fundamental understanding of cash flow within economic and business contexts, highlighting its types, importance, and the critical distinction from profit, along with guidance on improving and reporting cash flow.

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Cash Flow: Definition and Concepts

Definition and concepts.

A cash flow statement represents significant financial declarations for a business or project. It provides information about cash receipts and payments of a venture for a given time frame (Profit, p. 33). The document is crucial for determining a firm’s stability in the business. Cash flow statements help in tracing the various sources of cash such as operations, sales of current and fixed assets, issuance of share capital, and borrowed income. Further, it shows cash outflows, including the purchase of existing and fixed assets, the redemption of debentures, and preference shares, among other expenses (Klammer, p. 200). According to Profit, a cash flow statement contains essential information that provides a basis for evaluating a company’s ability to generate cash and cash equivalents as well as the needs of the venture to utilize such cash flows (p. 34).

The preparation of cash flow statements aims at fulfilling several objectives. For instance, it helps to determine a project’s rate of return. As well, traders use cash flow statements to identify problems with an enterprise’s liquidity. Khan et al. postulate that a business can fail in the event of cash shortages despite being profitable (p. 953). In addition, cash flow statements guide businesses in determining profits as well as evaluating default perils and re-investment needs. Arnold et al. maintain that cash flow should be distinguished from profitability (p. 46).

Fundamental Methodologies and Examples

There are three methodologies of preparing cash flow statements, namely, operation, investment, and financing activities. Klammer notes that the operations option entails two approaches, which include the direct and indirect methods (p. 232). Operating activities represent the primary revenue-generating endeavors of an enterprise as well as other businesses that do not involve investments or funding. Operating activities encompass transactions that involve revenue receipts and expenses that affect net income (Khan et al, p. 954). The direct method presents a cash flow statement as an income statement or a profit and loss account determined on a cash basis. In this technique, the difference between cash receipts and cash payments provides the net cash flow. It is noteworthy that the direct method omits non-cash transactions. Items of cash in-flow include receipts from the sale of products, royalties, fees, and commissions, among other revenue(Arnold et al, p. 47). The cash out-flow encompass payments to suppliers of goods or services and employees. Klammernotes that it is necessary to make adjustments for an increase/decrease in both current assets and liabilities to get net cash flows from the operations (see table 1).

The alternative method uses the net profit/loss for the given time frame as the base (see table 2). However, it is essential to make adjustments for items that influenced the income statement but did not impact the cash. Moreover, the indirect method requires the addition of non-cash and non-operating charges in the revenue declaration to the net earnings (Klammer 245). As well, it mandates subtraction of non-cash and non-operating credits to determine the operating profit before working capital changes. Again, it is mandatory to make adjustments in both current assets and liabilities to establish the remaining cash flow from the firm’s operations (Arnold et al, p. 46).

Analysts compare statements from operating activities with an enterprise’s net income to assess the quality of its paychecks. For example, when cash flow is higher than net income, economists give the company’s earnings a higher rating(Profir, p. 38). Contrastingly, low cash flow from operations signals an alarm to investors. An example of a cash flow statement from operations for Apple Inc. between April 1st, 2017, and March 31st, 2018 is shown in table 3.

Further, a firm can analyze cash flows using investment activities, which involve acquisitions and sales of long-term assets. Investing activities comprise firms’ transactions and events that entail the purchase of long-term productive assets that are not meant for resales such as land, equipment, and machinery. Items from cash inflows from investing activities include cash receipts from the sale of fixed assets, including intangibles, shares, and warrants (Klammer 270). Further, repayments of overdrafts and loans given to third parties form part of cash inflows for investing activities. In addition, cash earnings and expenditures that associate with future, option, swap, and forward contracts fall in the category of investing activities. According to Arnold et al., items of cash outflows from investing activities include payments made in the acquisition of fixed assets and expenses on capitalized research and development expenditures (48). Likewise, cash outflows comprise payments made to obtain shares, permits, debt instruments of other companies, interests in joint ventures, cash upfronts, and lendsmade to third parties (see table 4).

Table 5 shows an example of a cash flow statement from investment activities for Colgate in 2015. The company’s cash flow from investments amounted to $685 million in 2015 and $859 million the previous year. Moreover, the table estimates that Colgate’s principal capital reached $691 million in 2015 while it amounted to $757 million in 2014. The company obtained $599 million as earnings from the disposal of vendible securities and reserves (Klammer, p. 270).

Additionally, cash flows can be analyzed from the funding activities of an enterprise. Such activities cause changes in the scope and structure of a firm’s capital and debt (Klammer 280). Items of cash inflows from financing activities comprise proceeds from issued shares, bonds, debentures, loan notes, and other temporary borrowings. Particulars of cash outflows for this method include cash repayments of borrowed funds and dividends (Arnold et al, p. 52). Preparation of cash flow statement from financing activities is shown below in Table 6. Furthermore, an example of cash flow analysis from financing activities for Amazon is shown in table 7.

For instance, cash flows for Amazon in 2014 involved repayments of long-term debt, capital, and finance lease obligations (see table 7). The proceeds from long-term financing remained consistently high. The information indicates that Amazon borrowed long-term debt continually. Likewise, repayments for long-term funding display massive cash outflow, which shows that the company paid long-term debt extensively in 2014. This information is crucial for investors to explore whether Amazonfinanced its debt by taking additional loans.

Works Cited

• Arnold, Allen G., et al. “Toward Effective Use of the Statement of Cash Flows.” Journal of Business & Behavioral Sciences , vol. 30, no. 2,2018, p. 46-54.
• Khan, Usman A, et al. “A Critical Analysis of the Internal and External Environment of Apple Inc.” International Journal of Economics, Commerce, and Management , vol. 3, no.6, 2015, pp. 955-961.
• Klammer, Tom. Statement of Cash Flows . 6th ed., John Wiley & Sons, 2018.
• Profir Ludmila. “Analysis of Financial Performance Based on the Relationship between Investments and Cash-Flow.” Management Intercultural , vol. 1, no. 40, 2018, pp. 33-48.

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Cash Flow Statement – Definition and Importance

What is a cash flow statement?

A cash flow statement is an important tool used to manage finances by tracking the cash flow for an organization. This statement is one of the three key reports (with the income statement and the balance sheet) that help in determining a company’s performance. It is usually helpful for making cash forecast to enable short term planning.

The cash flow statement shows the source of cash and helps you monitor incoming and outgoing money. Incoming cash for a business comes from operating activities, investing activities and financial activities. The statement also informs about cash outflows, expenses paid for business activities and investment at a given point in time. The information that you get from the cash flow statement is beneficial for the management to take informed decisions for regulating business operations.

Companies generally aim for a positive cash flow for their business operations without which the company may have to borrow money to keep the business going.

Importance of a cash flow statement

  For a business to be successful, it should always have sufficient cash. This enables it to pay back bank loans, buy commodities, or invest to get profitable returns. A business is declared bankrupt if it doesn’t have enough cash to pay its debts. Here are some of the benefits of a cash flow statement:

Gives details about spending: A cash flow statement gives a clear understanding of the principal payments that the company makes to its creditors. It also shows transactions which are recorded in cash and not reflected in the other financial statements. These include purchases of items for inventory, extending credit to customers, and buying capital equipment.

Helps maintain optimum cash balance: A cash flow statement helps in maintaining the optimum level of cash on hand. It is important for the company to determine if too much of its cash is lying idle, or if there’s a shortage or excess of funds. If there is excess cash lying idle, then the business can use it to invest in shares or buy inventory. If there is a shortage of funds, the company can look for sources from where they can borrow funds to keep the business going.

Helps you focus on generating cash: Profit plays a key role in the growth of a company by generating cash. But there are several other ways to generate cash. For instance, when a company finds a way to pay less for equipment, it is actually generating cash. Every time it collects receivables from its customers quicker than usual, it is gaining cash.

Useful for short-term planning: A cash flow statement is an important tool for controlling cash flow. A successful business must always have sufficient liquid cash to fulfill short-term obligations like upcoming payments.  A financial manager can analyze incoming and outgoing cash from past transactions to make crucial decisions. Some situations where decisions have to be made based on the cash flow include forseeing cash deficit to pay off debts or establishing a base to request for credit from banks.

Format of a cash flow statement

There are three sections in a cash flow statement: operating activities, investments, and financial activities.

Operating activities: Operating activities are those cash flow activities that either generate revenue or record the money spent on producing a product or service. Operational business activities include inventory transactions, interest payments, tax payments, wages to employees, and payments for rent. Any other form of cash flow, such as investments, debts, and dividends are not included in this section.

The operations section on the cash flow statement begins with recording net earnings, which are  obtained from the net income field on the  company’s income statement . This gives an estimate of the company’s profitability. After this, it lists non-cash items involving operational activities and convert them into cash items. A business’ cash flow statement should show adequate positive cash flow for its operational activities. If it doesn’t, the business may find it difficult to manage its daily business operations.

Investment activities:  The second section on the cash flow statement records the gains and losses caused due to investment in assets like property, plant, or equipment (PPE) thus reflecting overall change in the cash position for a company. When analysts want to know the company’s investment on PPE, they check for changes on a cash flow statement.

Capital expenditure (CapEx) is another important line item under investment activities. CapEx is the money which a business invests on fixed assets like buildings, vehicles or land. An increase in CapEx means the company is investing on future operations. However, it also shows that there is a decrease in company cash flow.

Sometimes a company may experience negative cash flow due to heavy investment expenditure, but this is not always an indicator of poor performance, because it may be leading to high capital growth.

Financial activities: The third section on the cash flow statement records the cash flow between the company and its owners and creditors. Financial activities include transactions involving debt, equity, and dividends. In these transactions, incoming cash is recorded when capital is raised (such as from investors or banks), and outgoing cash is recorded when dividends are paid.

Cash flow statement example

Following is an example of what a cash flow statement looks like. This is the cash flow statement for XYZ company at the end of Financial Year (FY) 2018.

From the above example, we can see that the computed cash flow for FY 2018 was $ 2,528,000. Let’s look at what each section is showing.

Operating activities: In this section, we can see incoming cash values recorded as positive while outgoing cash values are negative and are usually represented in brackets. When you subtract the outgoing value from the incoming value, you arrive at the net cash flow for operating activities. In this example, we can see that the net value for operating activities is positive, which is a good sign for investors.

Investing activities: Since the core operating activities are generating income, the business can now invest in equipment. Because the company is investing $500,000 in equipment, its cash flow in this section is negative. This negative value isn’t a bad thing—you can say that the company’s capacity to invest in PPE reflects its growth.

Financial activities: After investing in equipment, the company still has $10,000 to pay off its debts—in this case, notes payable. Besides this the company will still have plentiful to cover its loans in future.

  Net cash flow: When you add all three net values from the three sections on the cash flow statement, you arrive at the net cash flow value, which in this case is $ 2,528,000. This shows that the company has enough cash to continue operating.

What is negative cash flow?

Negative cash flow is a situation where a company has more outgoing cash than incoming cash. The money that the company is earning from sales may not be enough to cover its expenses, and it may have to borrow from external sources to cover the differences.

Following is a small example showing negative cash flow. Here you can see that the business paid more in expenses than the amount of income it brought in.

A negative cash flow doesn’t always imply that the company’s financial performance was bad. Sometimes the company’s incoming profit might be good, yet there is little money in the bank to pay off debts. Negative cash flow is common for small businesses, but it is unhealthy if it goes on for a long period.

A cash flow statement is a valuable document for a company, as it shows whether the business has enough liquid cash to pay its dues and invest in assets. You cannot interpret a company’s performance just by looking at the cash flow statement. You may need to analyse long term trends after referring to balance sheet and income statement in order to get a somewhat clear picture of how the company is faring.

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110 Cash Flow Essay Topic Ideas & Examples

Inside This Article

Are you struggling to come up with a cash flow essay topic? Well, you're in luck! In this article, we have compiled a list of 110 cash flow essay topic ideas and examples to help you get started. Whether you're a student looking for inspiration or a professional seeking to explore new concepts, these topics will surely provide you with the spark you need.

• The importance of cash flow management in small businesses.
• Analyzing the impact of cash flow on company growth.
• Cash flow forecasting: Techniques and best practices.
• The role of cash flow in investment decisions.
• Cash flow vs. profit: Understanding the difference.
• Exploring the relationship between cash flow and working capital.
• Cash flow challenges faced by startups and how to overcome them.
• The impact of economic downturns on cash flow.
• Cash flow management strategies for seasonal businesses.
• The role of cash flow in determining a company's financial health.
• Analyzing the cash flow statement of a successful company.
• Cash flow analysis: A tool for assessing business performance.
• The impact of cash flow on shareholder value.
• Cash flow management in the nonprofit sector.
• Cash flow challenges faced by family-owned businesses.
• The role of cash flow in mergers and acquisitions.
• Cash flow management in the healthcare industry.
• Exploring the impact of cash flow on employee morale.
• Cash flow management in the hospitality industry.
• Cash flow challenges faced by e-commerce businesses.
• The role of cash flow in determining creditworthiness.
• Cash flow management in the construction industry.
• Analyzing the cash flow statement of a failing company.
• Cash flow strategies for reducing financial risk.
• The impact of cash flow on pricing decisions.
• Cash flow challenges faced by government organizations.
• The role of cash flow in international business operations.
• Cash flow management in the manufacturing sector.
• Cash flow forecasting tools and software.
• The impact of cash flow on strategic decision-making.
• Cash flow challenges faced by the retail industry.
• The role of cash flow in project management.
• Cash flow management in the education sector.
• The impact of cash flow on marketing campaigns.
• Cash flow challenges faced by agricultural businesses.
• Cash flow management in the technology sector.
• Cash flow strategies for dealing with late payments.
• The role of cash flow in real estate investments.
• Analyzing the cash flow statement of a startup company.
• Cash flow analysis for evaluating investment opportunities.
• Cash flow challenges faced by transportation companies.
• The role of cash flow in debt management.
• Cash flow management in the entertainment industry.
• The impact of cash flow on business sustainability.
• Cash flow challenges faced by professional service firms.
• The role of cash flow in supply chain management.
• Cash flow strategies for managing inventory.
• Analyzing the cash flow statement of a multinational corporation.
• Cash flow analysis for evaluating business valuation.
• Cash flow challenges faced by the energy sector.
• The role of cash flow in strategic cost management.
• The impact of cash flow on financial reporting.
• Cash flow challenges faced by construction contractors.
• The role of cash flow in customer relationship management.
• Cash flow strategies for managing international operations.
• Analyzing the cash flow statement of a retail chain.
• Cash flow analysis for evaluating capital budgeting decisions.
• Cash flow challenges faced by the hospitality industry.
• The role of cash flow in risk management.
• Cash flow management in the fashion industry.
• The impact of cash flow on corporate governance.
• Cash flow challenges faced by technology startups.
• The role of cash flow in strategic pricing.
• Cash flow strategies for managing project cash flows.
• Analyzing the cash flow statement of a healthcare organization.
• Cash flow analysis for evaluating business turnaround strategies.
• Cash flow challenges faced by the automotive industry.
• The role of cash flow in financial planning.
• Cash flow management in the pharmaceutical sector.
• The impact of cash flow on investor relations.
• Cash flow challenges faced by professional sports teams.
• The role of cash flow in tax planning.
• Cash flow strategies for managing foreign exchange risk.
• Analyzing the cash flow statement of a telecommunications company.
• Cash flow analysis for evaluating strategic alliances.
• Cash flow challenges faced by the airline industry.
• The role of cash flow in corporate social responsibility.
• Cash flow management in the food and beverage industry.
• The impact of cash flow on employee compensation.
• Cash flow challenges faced by the insurance sector.
• The role of cash flow in intellectual property management.
• Cash flow strategies for managing regulatory compliance.
• Analyzing the cash flow statement of a technology giant.
• Cash flow analysis for evaluating business expansion strategies.
• Cash flow challenges faced by the banking industry.
• The role of cash flow in corporate culture.
• Cash flow management in the renewable energy sector.
• The impact of cash flow on organizational structure.
• Cash flow challenges faced by the gaming industry.
• The role of cash flow in strategic alliances.
• Cash flow strategies for managing customer credit risk.
• Analyzing the cash flow statement of a financial institution.
• Cash flow analysis for evaluating business diversification strategies.
• Cash flow challenges faced by the telecommunications industry.
• The role of cash flow in product development.
• The impact of cash flow on employee training and development.
• Cash flow challenges faced by the healthcare industry.
• The role of cash flow in strategic marketing.
• Cash flow strategies for managing supplier relationships.
• Analyzing the cash flow statement of a hospitality chain.
• The role of cash flow in strategic decision-making.

These 110 cash flow essay topics and examples cover a wide range of industries and concepts related to cash flow management. Whether you're interested in analyzing financial statements, exploring strategies for improving cash flow, or understanding the impact of cash flow on various business aspects, these topics will provide you with a solid foundation for your essay. So, pick a topic that interests you the most, conduct thorough research, and start writing an insightful and engaging essay on cash flow.

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Cash Flow Analysis: Basics, Benefits and How to Do It

Cash flow is the amount of cash and cash equivalents, such as securities, that a business generates or spends over a set time period. Cash on hand determines a company’s runway—the more cash on hand and the lower the cash burn rate, the more room a business has to maneuver and, normally, the higher its valuation.

Cash flow differs from profit. Cash flow refers to the money that flows in and out of your business. Profit, however, is the money you have after deducting your business expenses from overall revenue.

What Is Cash Flow Analysis?

There are three cash flow types that companies should track and analyze to determine the liquidity and solvency of the business: cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. All three are included on a company’s cash flow statement.

In conducting a cash flow analysis, businesses correlate line items in those three cash flow categories to see where money is coming in, and where it’s going out. From this, they can draw conclusions about the current state of the business.

Depending on the type of cash flow, bringing in money in isn’t necessarily a good thing. And, spending money it isn’t necessarily a bad thing.

Video: What Is Cash Flow Analysis?

Key Takeaways

• Cash flow analysis helps you understand how much cash a business generated or used during a specific accounting period.
• Understanding cash sources and where your cash is going is essential for maintaining a financially sustainable business.
• A business may be profitable and still experience negative cash flow or lose money and experience positive cash flow.
• Complementary measurements, such as free cash flow and unlevered free cash flow, offer unique insights into a company’s financial health.

Cash Flow Analysis Explained

Cash flow is a measure of how much cash a business brought in or spent in total over a period of time. Cash flow is typically broken down into cash flow from operating activities, investing activities, and financing activities on the statement of cash flows, a common financial statement.

While it’s also important to look at business profitability on the income statement, cash flow analysis offers critical information on the financial health of a company. It tells you if cash inflows are coming from sales, loans, or investors, and similar information about outflows. Most businesses can sustain a temporary period of negative cash flows, but can’t sustain negative cash flows long-term.

Newer businesses may experience negative cash flow from operations due to high spending on growth. That’s okay if investors and lenders are willing to keep supporting the business. But eventually, cash flow from operations must turn positive to keep the business open as a going concern.

Cash flow analysis helps you understand if a business’s healthy bank account balance is from sales, debt, or other financing. This type of analysis may uncover unexpected problems, or it may show a healthy operating cash flow. But you don’t know either way until you review your cash flow statements or perform a cash flow analysis.

In addition to looking at the standard cash flow statement and details, it’s often also useful to calculate different versions of cash flow to give you additional insights. For example, free cash flow excludes non-cash expenses and interest payments and adds in changes in working capital, which gives you a clearer view of operating cash flows. Unlevered free cash flow shows you cash flow before financial obligations while levered free cash flow explains cash flow after taking into account all bills and obligations.

Depending on the size of your company, your financial situation, and your financial goals, reviewing and tracking various forms of cash flow may be very helpful in financial planning and preparing for future quarters, years, and even a potential downturn in sales or economic conditions.

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Why Is Cash Flow Analysis Important?

A cash flow analysis determines a company’s working capital — the amount of money available to run business operations and complete transactions. That is calculated as (opens in new tab) current assets (cash or near-cash assets, like notes receivable) minus current liabilities (liabilities due during the upcoming accounting period).

Cash flow analysis helps you understand if your business is able to pay its bills and generate enough cash to continue operating indefinitely. Long-term negative cash flow situations can indicate a potential bankruptcy while continual positive cash flow is often a sign of good things to come.

Cash Flow Analysis Basics

Cash flow analysis first requires that a company generate cash statements (opens in new tab) about operating cash flow, investing cash flow and financing cash flow.

• Cash from operating activities represents cash received from customers less the amount spent on operating expenses. In this bucket are annual, recurring expenses such as salaries, utilities, supplies and rent.
• Investing activities reflect funds spent on fixed assets and financial instruments. These are long-term, or capital investments, and include property, assets in a plant or the purchase of stock or securities of another company.
• Financing cash flow is funding that comes from a company’s owners, investors and creditors. It is classified as debt, equity and dividend transactions on the cash flow statement.

Preparing a Cash Flow Statement

Let’s first look at preparing the operating cash flow statement. The line items that are factored into the company’s net income and are included on the company’s operating cash flow statement include but are not limited to:

• Cash received from sales of goods or services
• The purchase of inventory or supplies
• Employees’ wages and cash bonuses
• Payments to contractors
• Utility bills, rent or lease payments
• Interest paid on loans and other long-term debt and interest received on loans
• Fines or cash settlements from lawsuits

There are two common methods used to calculate and prepare the operating activities section of cash flow statements.

The Cash Flow Statement Direct Method takes all cash collections from operating activities and subtracts all of the cash disbursements from the operating activities to get the net income.

The Cash Flow Statement Indirect Method starts with net income and adds or deducts from that amount for non-cash revenue and expense items.

The next component of a cash flow statement is investing cash flow. That bottom line is calculated by adding the money received from the sale of assets, paying back loans or selling stock and subtracting money spent to buy assets, stock or loans outstanding.

Finally, financing cash flow is the money moving between a company and its owners, investors and creditors.

Cash Flow Analysis Example

Net income adjusted for non-cash items such as depreciation expenses and cash provided for operating assets and liabilities.

Hannah’s Bananas: Cash Flow Statement for the Month Ended March 2024

Hannah’s Bananas financial report shows a cash flow increase in $22,000 for the month. The company’s effective operations led to an inflow of $35,000, demonstrating its ability to manage core business activities profitably. Despite some spending on investing activities resulting, it signifies a focus on long term growth. Meanwhile, the moderate net inflow from financing activities suggests an approach to managing equity and debt. Hannah’s Bananas is strategically financing its growth while also rewarding shareholders with dividends. Overall, the company’s cash flow actions highlight efficiency investments for growth and sound financial management practices that set the stage for future stability and expansion.

Five Steps to Cash Flow Analysis

There are a few major items to look out for trends and outliers that can tell you a lot about the health of the business.

When operating income exceeds net income, it’s a strong indicator of a company’s ability to remain solvent and sustainably grow its operations.

On the other hand, positive investing cash flow and negative operating cash flow could signal problems. For example, it could indicate a company is selling off assets to pay its operating expenses, which is not always sustainable.

When it comes to investing cash flow analysis, negative cash flow isn’t necessarily a bad thing. It could mean the business is making investments in property and equipment to make more products. A positive operating cash flow and a negative investing cash flow could mean the company is making money and spending it to grow.

What you have left after you pay for operating expenditures and capital expenditures is free cash flow. This can be used to pay down principal, interest, buy back stock or acquire another company.

The operating cash flow margin ratio measures cash from operating activities as a percentage of sales revenue in a given period. A positive margin demonstrates profitability, efficiency and earnings quality.

Cash flow analysis helps your finance team better manage cash inflow and cash outflow, ensuring that there will be enough money to run—and grow—the business.

Free Cash Flow Analysis Template

With modern accounting and bookkeeping software, or an updated ERP, you can likely generate a statement of cash flows with just a few clicks. If you’re new to free cash flow analysis, here’s a template you may find helpful in calculating cash flow for your business.

View the template here (opens in new tab)

Analyze Cash Flow With Software

The math behind a free cash flow analysis can be complex, particularly for large companies or those with complex finances. However, bookkeeping or accounting software, sometimes part of a larger ERP, take care of much of the heavy lifting for you. Once your reports are setup in an ERP like Oracle NetSuite, your cash flow, free cash flow, and other numbers, and the underlying details, are just a few clicks away.

Large companies employ teams of financial planning and analysis (FP&A) professionals who spend their entire workday digging into the details of financial results looking for patterns and opportunities to improve results. With a powerful ERP available, much of that process is automated, allowing you to do more with fewer staff.

Small businesses and large enterprises alike should understand their cash flow and cash position with regular check-ins. NetSuite helps you achieve better results through automated reporting, machine learning and AI-driven analysis, and extensive financial analysis tools to give you accurate, timely information about your business.

Cash Flow Analysis Is Critical for Every Business

Savvy investors would never buy the stock of a company without first looking at its financial statements , including cash flow. A more detailed cash flow analysis — provided through ERP and advanced accounting software — offers insights into the financial health and future performance of a business. Business owners, managers, and executives should look at similar data on their companies on a regular basis to ensure it’s on track to meet its short-term and long-term financial goals.

Cash flow and cash flow analysis are important for virtually every business. Working without cash flow knowledge is like a pilot flying blind. Never run your business without updated, accurate cash flow data.

Cash Flow Analysis FAQs

What is cash flow analysis with an example.

Cash flow analysis is a method of reviewing cash flow details for a business. An example may be as simple as looking at the latest cash flow statement or require more complex calculations, ratios, and comparisons.

What is the purpose of cash flow analysis?

Cash flow analysis helps business owners, managers, executives, lenders, and shareholders understand if a company is generating cash or using cash, and the breakdown of where those cash movements are happening in the company.

How do you analyze cash flow?

Cash flow analysis typically begins with the statement of cash flows, which breaks down cash flows into sections for operating, financing, and investing activities. Analysis includes looking for trends, areas of strong performance, cash flow problems, and opportunities for improvement.

What is cash flow software?

Cash flow software is software that helps calculate and analyze cash flow. Bookkeeping software, accounting software, and ERP software typically include cash flow software modules or components.

What is a cash flow analysis?

Cash flow analysis is a review of business cash flows with a goal of finding trends or opportunities that allow for improved business decisions and improved long-term growth and sustainability.

What tools do you currently use to manage cash flows?

Most business leaders looking to manage cash flows use their ERP or accounting software as a key tool, such as Oracle NetSuite. They may also use spreadsheet software to complement analysis and research.

Financial Management

Cash Flow Statement Explained

One question is fundamental to any business: How much money is coming in versus how much is going out? A cash flow statement answers that and provides a clear picture of whether a company has…

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72 Cash Flow Essay Topic Ideas & Examples

🏆 best cash flow topic ideas & essay examples, 📑 good essay topics on cash flow, ✅ simple & easy cash flow essay titles.

• Discounted Cash Flow and Relative Valuation Techniques But the value of the Income is not derived from the value of the capital goods. On the contrary, the value of the capital is derived from the value of the Income”.
• Mercury Athletic Footwear’s Discounted Cash Flow It could also be argued that the merger would help AGI to negotiate better terms with its suppliers and low its cost of sales.
• Hal’s Cash Flow Problems This limits the amounts of liquid funds in the entity. Subsequently, the cash requirements in the entity will outstrip Hal’s cash inflows.
• Cash Flow Estimation Biases Any segmentation starts from a thorough analysis of the market conditions in which the company is working, and an evaluation of the possibilities and the threats that the company might face.
• The Cash Flow-Based Financial Strategy in China Information about financial flows allows the management to measure the state of affairs connected with the company’s cash and analyze the problems in this area, controlling the organization’s performance.
• Cash Flow Challenges in Health Care Systems The top two challenges in healthcare institutions’ cash flow include awaiting patients to pay from their pockets and waiting for the insurance payers.
• Profit & Cash Flow and Their Role in Business Contrary, cash flow is an aggregate net flow in the form of cash both into the business and out of the business operations.
• Starbucks Corporation’s Cash Flow Analysis The company’s operating cash flow dropped significantly by the pandemic but returned to 2019 in 2021. Compared to its competitors Dunkin ‘Donuts and McDonald’s, Starbucks has better investment cash flow indicators, which speaks to the […]
• The Incremental Cash Flow Evaluation Thus, planning to be involved in any new project, a company should address incremental cash flow that may be defined as the cash flow acquired by it in the case of the project’s undertaking.
• Cash Flow Problems and Organizational Design Accordingly, it is required to purchase them in a continuous manner in order to ensure the uninterrupted functioning of the enterprise.
• Blue Apron Holdings Inc.’s Cash Flow Statement The first one is a good criterion of how the company manages its investments in a crisis like 2020. 8%, characterized it as being a mindful decision-maker in the critical time the company is less […]
• Mergers & Acquisitions: Discounted Cash Flow Methods The assessed association value depends on the evaluation of the underlying business and assets. When it comes to the adoption of DCF, many first-rate companies have not made any money and are still in high […]
• Meriden Products: The Free Cash Flow The table below displays the free cash flow for Meriden Products for the three years. Free cash flow for the three years shows a positive incremental growth.
• Cash Flow and Its Importance to Corporations The advantages of cash flow to a corporation are vital and cannot be overlooked. It should be noted that cash flow is used in other instances to gauge the management of a corporation.
• Cash Flow Statement As a result, the income statement and the operating section are similar in terms of presented cash inflows and outflows because the information for the cash flow statement is often taken from the income statement […]
• Cash Flow Decisions: Franchise, Sell Off Upon examining the financial reports of the company it could be observed that the company did not pay any dividends in 2009 as the company made loss in the previous year.
• Cash Flow and Related Decisions in Business Activity In this essence cash flow is a determinant to various important decisions in the organization that have to be considered. One of the areas where cash flow is important is in basic operations of the […]
• “End Exploitation and Cat on Cash Flow Disclosure” by Reilly It is necessary to analyze and study the cash flow statement, because it helps to assess the capability of the company very fast and the results obtained will be evident, correct and trustful.
• Specialized Accounting: Cash Flow Statement Indirect Method Under the indirect approach, the first item that is presented in the operating activities section of the statement of cash flows is net income, which is then adjusted.
• Cash Flow Statement: Analyzing Financial Activities In terms of financial activities, it is essential to realize not only the meaning of a statement of cash flows but also the types of its calculation.
• Cash Flow Statements for Financial Management This is the basic report as it reflects the company’s activities related to the production and distribution of its products and services.
• Cash Flow and Other Financial Statements Thus, it is essential to understand the value of a cash flow statement and ensure that a company calculates the ratios on a regular basis.
• Cash Flow, Profit and Loss Account, Balance Sheet The following is first years, trading account, Cash flow and balance-sheet: The young, the old, the well to do in the society, and the poor will be my target customers and thus my market size […]
• Amazon.com Inc.’s Cash Flow Statement in 2007 From the table, in 2006, the net cash flow used in financing activities amounted to US$ million. From the table, in 2006, the net cash flow used in investing activities amounted to US$ million.
• Jonesboro Newspaper’s Budget and Cash Flow A budget enables an individual to forecast the amount of money to be realized upon the execution of a given undertaking. A part of the income from the company will be used to cater for […]
• UK Coal Company’s Cash Flow Statement Another example of an item that does not involve the flow of cash is the net increase in the fair value of the assets. There was a general decrease in the cash and cash equivalents […]
• Lowe’s Corporation’s Cash Flow Statement in 2014-16 In the previous analysis part, balance sheets of Lowe’s Company were analyzed for the last three years, which indicated that the company’s net book value increased in 2016. The return on equity of Lowe’s significantly […]
• ABC Company’s Cash Flow and Scoring Methods The right selection of new projects is determined by the experience and judgement of all managers involved in the selection process.
• Cash Flow Gap, Cash Balance, and Cash Cycle What is more paramount is to develop the mechanisms of managing cash because it is the employment of such tools that makes the business successful and protects it from bankruptcy and negative influence of economic […]
• Bunzl Cash Flow Statement The company’s net cash outflow from investing activities has increased by almost 387% in the year 2010. The company has purchased nine other companies in the year 2010.
• Concepts of Budget and Cash Flow Analysis A liability are any claims against the assets of a business or financial organization, they are the obligations that the business has for or against the external stakeholders of the business which may be the […]
• The Relationships Between Cash Flow and Effective Tax Rate
• Accounting: Depreciation and Cash Flow
• The Link Between Generally Accepted Accounting Principles and Cash Flow
• Practices From Calculating Interest Rates to Assessing Cash Flow Statements
• Accounting Standard: Cash Flow Statements
• Relations Between Accrual Balance and Cash Flow Statement
• Agency Cost, Top Executives’ Overconfidence, and Investment-Cash Flow Sensitivity
• Airbus: Operating Cash Flow and Market Risk
• The Cash Flow Problems a Business Might Experience
• The Relationship Between the Product Life Cycle and Cash Flow
• Analyst Cash Flow Forecasts and Pricing of Accruals
• Arcadian: Cash Flow and Terminal Value
• Artificial Neural Network Model for Risk Impacts on Cash Flow
• Asymmetric Cash Flow Sensitivity of Cash Holdings
• The Link Between Balance Sheet and Statement of Cash Flow
• Bank Commitment Relationships, Cash Flow Constraints, and Liquidity Management
• The Relationships Between Capital Budgeting and Cash Flow Estimation
• Cash Flow and Capital Spending: Evidence From Capital Expenditure Announcements
• Capital Budgeting: Cash Flow Projections of Bauer Industries
• Cash Flow and Discount Rate Risk in the Investment Effect
• The Role of Cash Flow in the Market Value Approach
• Cash Flow and Investment: Evidence From Internal Capital Markets
• The Link Between Cash Flow, Business Management, and Financial Statements
• Cash Flow and Owners’ Equity in the Payless Shoe Source Company
• Analysis of Cash Flow Estimation and Capital Budgeting
• Cash Flow and Risk Premium Dynamics in an Equilibrium Asset-Pricing Model
• Agency Problems and Audit Fees: Further Tests of the Free Cash Flow Hypothesis
• Cash Flow Asymmetry: Causes and Implications for Conditional Conservatism Research
• Capital Asset Pricing Model – Discounted Cash Flow
• Cash Flow, Consumption Risk, and the Cross-Section of Stock Returns
• Caledonia: Net Present Value and Free Cash Flow
• Cash Flow: Direct and Indirect Presentations
• Correlation of Brand Perception, Cash Flow Stability, and Financial Policy
• Cash Flow Disaggregation and the Prediction of Future Earnings
• Bond Portfolio Duration, Cash Flow Dispersion, and Convexity
• Cash Flow – Financial Planning Tool in the Tourism Units
• Banners Broker Ponzi Scheme: More Publicity and Cash Flow Controls
• Cash Flow Immediacy and the Value of Investment Timing
• Bank Ties and Bond Market Access: Investment-Cash Flow Sensitivity in Japan
• Cash Flow Management and Manufacturing Firm Financial Performance
• Chicago (A-D)
• Chicago (N-B)

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What is cash flow and why is it important for small businesses?

Cash flow: It’s a term you’ve probably heard before, but might not understand yet. As a small business owner or freelancer, it’s important to understand what cash flow is and how it impacts your business, since the survival of your business depends on it.

What is cash flow?

Cash flow measures the net amount of cash and cash equivalents coming into and going out of a business over a set period of time. It indicates the financial health of your business by showing how much cash your business has on hand.

‍ ‍ Studies show that one of the top reasons most businesses fail is because they don’t have enough cash on hand.

Cash flow management lets you forecast expenses, prepare for dry months, and even know what to charge your clients. For example, being able to tell if you'll be bringing in less money in the coming month will allow you to spend and invest your money responsibly.

Chapter 1: What is cash flow?

Let’s answer the question on everyone’s mind: What is cash flow? Defining cash flow is simple: Cash flow represents the movement of money in and out of your business .

Think of it this way: Your cash flow represents all the transactions you make. When you have more than enough money in your account to cover your bills, you have a positive cash flow. But when the cash flowing out of your business (i.e. expenses) exceeds the cash coming into your business (i.e. revenues and income), that’s when you have a cash flow issue.

Accounts receivable versus accounts payable

It’s important to differentiate between accounts receivable and accounts payable. Accounts receivable represents your assets, like a positive bank balance or cash on hand. Accounts payable rounds up your liabilities , like payments or debts you owe. What is accounts receivable?

Accounts receivable is an asset account that keeps track of money coming into your business (money you receive from your customers for the goods and services you provided). This is an important part of calculating the profitability of your business.

What is accounts payable?

Accounts payable is a liability account that tracks the money leaving your business (as we mentioned, this is the money that you owe). This may include employee payroll, bank loans, or other business expenses.

Determining the profitability of your business

You can determine profitability by adding up all of your assets, including accounts receivable, and subtract your total accounts payable. If the result is positive, your business is profitable. If it’s negative, then you will need to look at ways to increase profitability.

Another key point to note: A positive cash flow doesn’t always equal profit .

The difference between profit and cash flow

Because cash flow only represents the balance in your bank account, it’s possible for your business to turn a profit and still have zero cash. For example: You might earn a 30% profit on every product you sell, but if you have more expenses than income, you still have negative cash flow.

Your business could turn a profit of $20,000 one month but only see $8,000 of that in cash flow because the rest is pending in accounts receivable. That’s why profit and cash flow aren’t interchangeable terms.

Chapter 2: Why cash flow is crucial

Cash flow is the lifeblood of your business. Positive cash flow is what makes your business flourish, and the pace of cash flow is just as important as having cash flow at all. When you have enough money put aside, it’s easier to pay your expenses as they come due. But when your cash only trickles in, you can stumble into cash flow issues.

Cash flow for small businesses

If you’re thinking about starting a business or you recently launched a new one, you’ll need to invest some cash in the early days to get set up. You might need to buy new equipment, pay for a website, or put down a deposit to rent office space. That’s why you shouldn’t be alarmed if you see more money leave your business than come in—at least initially.

"[Cash flow problems] might be good news, because as a business is growing is often when you start to have those cash flow problems," said Facebook's Sheryl Sandberg in an interview with Inc .

To fund these expenses and still have capital left over for when your business opens its doors, you’ll need to understand how to manage and protect your cash flow. For starters, you may need to invest some of your own money to cover your startup costs. For those who have a tight budget, you can also explore other financing options to cover startup costs, such as:

• A business loan
• A line of credit
• A small business grant

It’s common for small business owners to rely on these kinds of funds until their businesses begin to grow.

Seasonal businesses and cash flow

If you’re a seasonal business owner, strong cash flow management skills are even more important. Because you’ll see an influx of cash during a specific season and little-to-no cash the remaining months of the year, learning cash flow management can help keep your business finances in the black even in your offseason.

These simple steps will get you started in the right direction:

1. Put together a cash flow statement

A little later, we’ll show you how to generate a cash flow statement. For now, it’s important to understand that putting together a cash flow statement will show all your business transactions (both income and expenses).

It generally includes three sections: cash from operations , cash from financing , and cash from investing .

2. Forecast your expenses

Using your cash flow statement, you can see which months you’ll likely feel the pinch in your cash flow. Once you identify those periods, you can create an expense forecast. Basically, you’ll estimate your operational costs for those months, including your rent, payroll, and any other recurring monthly expenses to see how much you’ll need on hand.

While a cash flow statement allows you to observe the cash history of your business and analyze any patterns, an expense forecast helps you make an educated guess about your future business spending.

Using your expense forecast, you’ll know exactly how much to set aside for slower periods .

3. Plan ahead

Whether you’re a seasonal business owner or simply experience slow sales periods throughout the year, planning ahead can save you time and stress. Here’s where forecasting from the last step comes in.

To prevent any problems before they crop up, take those anticipated payments for your slower seasons, figure out which payments you can and can’t delay, then set aside enough cash from peak sales periods to cover all of your operating expenses during off-season. Also consider setting aside an extra cash buffer to cover any unexpected costs.

To help you accurately forecast your expenses and plan ahead, try creating a calendar for your operating expenses. Add entries for all recurring payments and their due dates. That way, you have an at-a-glance view of your expenses and when they’re due.

Chapter 3: How to understand, calculate, and manage cash flow

Whether you’re an established business or a startup, hiring an accountant or bookkeeper might not be financially feasible just yet. Fortunately, when it comes to calculating cash flow, you don’t need either one. Using tools like Wave's accounting software and cash flow calculator , you can track your cash flow automatically.

Wave also syncs with your bank accounts* (with the Pro Plan), is compatible with other accounting software packages, and gives you access to one of the most important tools you’ll need: a cash flow statement . Cash flow statements shouldn’t be confused with income statements or balance sheets . Each of these are distinct from one another and serve different purposes.

Cash flow statement versus income statements and balance sheets

Income Statement

An income statement shows your business’s financial performance during a given accounting period.

• Is it overperforming?
• Underperforming?

These are questions an income statement helps answer.

Balance Sheet

A balance sheet, on the other hand, tracks your company’s liabilities and assets over a period of time. This report is a snapshot of your business’s financial health at any given moment.

• What debts does your business have?
• What assets does it have?
• What is your business worth?

For larger corporations, it’s also what you use to calculate shareholder equity and the rate of returns.

Cash Flow Statement

Last (but certainly not least), cash flow statements show how cash is moving into and out of your business. Typically, these statements break down cash flow activity into three different segments for easier tracking: operating flow, investing flow, and financing flow.

The terms may sound complex at first glance, but these segments can help you understand the nature of all your business transactions.

• Operating Flow: Operating flow refers to any income or spending that comes from your net income. That can include buying merchandise and revenues from selling your products or services. These transactions happen naturally as a result of operating your business day-to-day.
• Investing Flow : As the name implies, investing flow covers business investments. When you buy an item, like a commercial property or equipment, that will be used over and over to increase your business’s efficiency or profitability, that transaction falls in the investing flow category.
• Financing Flow: If you take out a business loan or pay out dividends to shareholders, these activities fall into the financing flow category. This segment covers any transactions around dividends, debt, and equity.

How do I talk to customers about how I want to get paid?

So, now that you understand what cash flow is, let’s cover how to manage it. One important factor is talking to your clients about getting paid on time.

Handling money-related conversations with customers can be tricky (not to mention awkward). But when you deliver a service or a product, you deserve to get paid. To ensure you get what you’re owed, follow these steps:

1. Be upfront

Being straightforward with your clients is often the best approach. Clearly communicate details about the payment contract, including:

• Payment amounts
• How payments should be made
• Who payments should be made payable to
• Where payments should be sent

2. Bring up payment penalties or rewards early on

As you’re putting together a contract or outlining payment expectations with a new client, make sure to mention whether you charge a fee for late payments, as well as any incentives for early or on time payments.

3. Talk about your billing process

Be clear about how and when clients can expect to receive invoices —this prepares them for what’s to come and is, again, another way to delve into other payment-related topics.

If you use invoicing software like Wave, you can easily send and track invoices like a pro.

How do I follow up on outstanding invoices without upsetting a customer?

A recent survey by Wave revealed that 25% of the small businesses polled waited a year to get paid, or still haven’t been paid at all. 70% waited between one and six months to get paid. Almost half of the surveyed businesses said cash flow was a major struggle.

For a lot of small business owners, dealing with outstanding invoices is a reality. No matter how organized you are, you may have a few clients who don’t pay on time (or at all). When that happens, here are a few things you can do to touch base with your clients without ruffling any feathers:

1. Automate the process

The best and easiest way to handle invoices and payments is by automating the process.

Money management tools like Wave offer features like recurring invoicing and automatic credit card payments , so you won’t have to chase down payments. You can also send statements to follow up on overdue customer accounts, and set automatic reminders to nudge your customer to pay on time.

Invoicing software also makes it simple to customize invoices, send billing and invoice reminders, and receive instant updates for your invoicing and payments data. Automating these tasks removes them from your to-do list and can help you get paid faster.

2. Send an email reminder

Following up on payments is never fun, but the best part about sending an email reminder is that you have an opportunity to think through your words and shape your message. Your tone may differ depending on how late the payment is, but initially aim to be firm and polite.

If you’re following up for the third or fourth time, your tone may be more assertive.

3. Get on the phone

If you still have an unresponsive client after a month, it’s time to pick up the phone.

First things first: Make sure they received your invoice. There’s always a possibility they were busy, their email changed, or, if you’re dealing with a larger company, your email could have been sent to the wrong person or department. There’s also the possibility that they saw it and pretended that they didn’t.

Once you know they’ve seen your invoice, you can move into discussing its past-due status.

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4. Take more stringent measures

If none of the above work, you could turn the invoice over to a collection agency or report the matter to a credit bureau.

How to avoid bad customers

Most customers have every intention of paying you, but there are always a select few you’re better off without. Here are a few tips to make sure you’re attracting the right customers to your business:

• Go for quality versus quantity : You’re better off with seven customers who pay on time than a hundred who pay little or nothing.
• Don’t try too hard to be affordable : If people are hesitant about your prices, it probably means you’re beyond their budget—in that case, you’re better off not forcing the sale.
• Ask for a deposit : Securing money up front can help soften the blow if the client defaults on future payments. The more you can secure upfront to cover the cost of your product or service, the better.

Now that we have a firm grasp on how to handle cash conversations with tact to encourage positive cash flow (also known as “inflow”), let’s talk about best practices for cash outflow.

Everything you need to know about cash outflow

There are many ways cash can leave your business. Here are a few best practices to help you better manage that money:

Managing payroll

Of all the payments you’ll make as a small business owner, one of the most important will be to the people who help keep your doors open every day—your employees. Manage your payroll well, keep employees happy, and avoid trouble with the law by following these tips:

• Write down your payroll dates : It’s easiest to make payments when you know when payroll is due. If you know this then all you have to do is make sure you have enough cash on hand as the date approaches.
• Pay electronically and keep immaculate records : Automating your payroll can be a timesaver. Just be sure to classify each employee correctly (as a W-2 or 1099 worker ) so their paychecks reflect the right deductions and taxes. Payroll software can help you run payroll for both contractors and W-2 employees quickly and accurately. They also keep pay records for each employee, which comes in handy during tax season and for other purposes as they arise.

Send invoices, estimates, and other docs:

• via links or PDFs
• automatically, via Wave

*While subscribed to Wave’s Pro Plan, get 2.9% + $0 (Visa, Mastercard, Discover) and 3.4% + $0 (Amex) per transaction for the first 10 transactions of each month of your subscription, then 2.9% + $0.60 (Visa, Mastercard, Discover) and 3.4% + $0.60 (Amex) per transaction. Discover processing is only available to US customers. See full terms and conditions for the US and Canada . See Wave’s Terms of Service for more information.

For more information about payroll forms - what they are, what they’re for, and when to use them - you can visit our Payroll Education Center.

Paying contractors

You can pay contractors on an hourly or per-project basis. Whichever you decide, make sure it’s clearly detailed in your contract along with other important information like project duration, payment frequency, deadline terms, and monetary penalties for late work.

In the U.S., you typically won’t withhold federal or state income tax from your contractors’ pay—they’ll be responsible for paying for those on their own.

If you’re processing payroll through a system like Wave, you can easily distinguish contractors from W-2 employees so the correct withholdings apply to each employee. Wave also tracks all the payments you make so that you have a readily accessible list of all payroll amounts and dates when and if you need it. And with the self-service features of Payroll by Wave, employees can access any pay stubs they need, anytime they need them.

Paying taxes

As a business owner, there’s no getting around taxes. You need to pay them and in most cases, you’ll need to pay every quarter.

Setting money aside will ensure you avoid any fines or penalties from the IRS. You can get an idea of what you can expect to pay each quarter (and what you should be putting away each month) by viewing the IRS 1040-ES form .

Paying bills

For bills, know who you owe, how much, and when they’re due. Keep a summary of these basics readily available and review them regularly.

You should also schedule time on a regular basis to fully review your accounts payable and accounts receivable reports. The timing of this review depends on the nature of your business and whether or not you’re having cash flow issues. Plan ahead and compare your expenses to your estimated revenue. This will not only help you to stay on top of your invoices and bills, but you may be able to set stronger, more realistic financial goals for your small business.

Once you have a firm understanding of how to manage the money moving out of your business, you’ll have a firm cash positioning and can maximize how you use your cash flow statement.

Chapter 4: How to calculate your cash flow

An important part of understanding cash flow is learning how to analyze it. The good news is, cash flow statement templates make calculating your cash position a breeze. Small business software, like Wave, makes the job even easier by displaying your cash flow ins and outs, cash positioning, and net change in simple graphs and charts.

Whichever tool you choose to use, it’s important to remember a cash flow statement simply gives you a high-level overview of your small business finances.

If you want deeper insight into your cash position, like finding out what you have leftover that you can use, you can use a cash flow formula to calculate what’s called your free cash flow (FCF), which is different from regular cash flow. FCF is a formula that allows you to find out how much cash you can safely use. Fortunately, calculating your FCF is almost as easy as figuring out cash flow. Just have your company’s income or balance sheet handy and follow this free cash flow formula :

Net income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure = Free Cash Flow

Okay, that was a lot. Let’s break it down a little more:

• Net income is how much money your business makes, once you subtract the money it spends.
• Depreciation refers to physical assets, like equipment. Amortization refers to non-physical assets, like trademarks. Both processes involve determining the value of the assets over their lifespans to reduce your taxable income.
• In simple terms, working capital refers to your total current assets subtracted by your current total liabilities.
• Capital expenditure is the money you invest in long-term assets, like equipment and the maintenance of that equipment.

One thing to keep in mind is that FCF takes into account only what you’re spending currently , not what you’ve already spent in the past. If you’ve fallen behind on debts or have other financial obligations, you should consider taking care of those first with your current FCF instead of investing that cash someplace else.

If math is not your strong suit, we’ve created a walkthrough of 6 cash flow formulas below that can help you gain insight into your business finances:

• Free cash flow formula
• Operating cash flow formula
• Net cash flow formula
• Discounted cash flow formula
• Levered free cash flow formula
• Unlevered free cash flow formula

Create a cash flow projection

Knowing whether the next month will see a financial feast or famine can help you make better decisions about spending, saving, and investing in your business today. If, for example, your cash flow projection suggests you’re going to have higher-than-normal costs and lower-than-normal earnings, it might not be the best time to buy that new piece of equipment. On the other hand, if you’re seeing a potential surplus, it might be the right time to invest in the business.

Forecasting your cash flow months or even a year ahead of time can help you plan your spending around your projected cash inflows. That’s where a cash flow projection comes in.

• In practical terms, a cash flow projection chart includes 12 months laid out across the top of a graph, and a column on the left-hand side with a list of both payables and receivables.
• This column typically begins with “operating cash,” or unused earnings from the previous month. For example, if your cash flow projection for January suggests a surplus of $5,000, your operating cash for February is also $5,000.
• Below operating cash, list all expected accounts receivable sources—such as sales, loans, or grants—leaving a space at the bottom to add them all up.
• Next, list all potential payable items—such as payroll, overhead, taxes, and inventory—with another space to add their total below.
• Once you have your numbers prepared, simply subtract the total funds that are likely to be spent from the cash that is likely to be received to arrive at the month’s cash flow projection.
• Once you’ve calculated your monthly cash flow, take the final number and list it at the top of the next month’s column under operating cash, and repeat the process until you’ve got a forecast for the next 12 months. After the end of each month, be sure to update the projection accordingly, and add another month to the projection.

If you prefer to use a ready-made chart to help you create your projection, you can pull your financial data from the Reports section of Wave and feed it into this cash flow forecast template .

Chapter 5: How to optimize your business around cash flow

You can see by now how businesses revolve around cash flow, no matter how profitable they may be. One poorly implemented cash practice can send a business spiralling, which is why it’s important to keep your cash flow steady and stable.

To help you optimize your business’s cash flow, follow these expert pointers:

Decide payment terms early on

Getting paid on time is important, otherwise you run the risk of seeing your cash flow dry up. One way to sidestep any issues is by setting clear payment expectations from the get-go with your clients—both in a contract and verbally.

A strategy you could use to incentivize customers is offer them payment discounts when they pay early. For example, knock 2% off the payment balance or apply that discount to a future payment. Subsequently, you can penalize clients for late payments by charging fees and interest.

Whichever approach you take, just be sure to detail your payment terms in the client contract so the penalties don’t come as a surprise.

Make it easier to pay

While most customers have every intention of paying you, tough payment processes can get in the way and prevent even some of the timeliest customers from pulling out their wallets until the last minute. The lesson to be learned? Make your process as simple and convenient as possible. For example, reduce the number of clicks it takes to make a payment. Or offer multiple ways to pay. The easier your process, the faster you’re likely to see cash roll in on time.

Wave, for instance, allows businesses to collect and receive online payments from customers in as little as two days, directly from an invoice. Allowing your customers to make payments via credit card and bank transfers is not only convenient for them – it increases your likelihood of being paid on time by 15%. Learn more from the video below!

Manage your inventory well

One nightmare scenario for business owners is having hard-earned dollars tied up in idle or wasted inventory. For instance, as a restaurateur, if you spend $500 on lettuce, it’d be a shame to use only $150 worth and see the remaining $350 of greens spoil and go straight to the trash. That money would've worked harder for you someplace else. That’s why with inventory, you’re better off ordering just enough to keep your holding costs low and free up cash.

Striking the right balance can get tricky; fortunately, technology removes much of the burden of having to manually track and forecast what you’ll need to run an effective daily operation. Wave's business accounting software , for instance, makes it simple to monitor your inventory costs, record purchased inventory and sold inventory, and access reports for it all. You can also use inventory management software like Shopify POS or TradeGecko to monitor and create season-specific stock forecasts to ensure you have just the right amount of products on hand to meet your needs.

With these tools on hand, it’s easier to manage your inventory levels and purchase products at exactly the right time and in the right quantity—just when you need them.

Have a well-rounded marketing approach

If you’re targeting customers through only one marketing channel—say print advertising—you’re limiting your reach. Instead, embrace an approach that attracts customers through multiple mediums simultaneously, like print ads plus social media marketing and a Google AdWords campaign. Focus on the marketing tactics that make sense for your niche and your business. A multi-channel marketing approach will not only increase your business’s exposure and attract more sales, but it can help boost your cash flow and bring in revenue at a steadier pace.

But steady is only one part of the equation. If you want your business to operate like a well-oiled machine, your cash needs to come in steady and fast. So, next we’ll tackle how to optimize the speed of your cash flow.

Chapter 6: How to get faster cash flow

It happens. Your records show a profit of $20,000, but all you have in your business account is $3,000, which might tide you over until the following week. But when this scenario repeats itself regularly with no solution in sight, you’re eye-to-eye with a major cash flow issue.

The good news is you’re not alone. Businesses everywhere face the same struggle every day. As we mentioned, at the end of the day, profits mean little if you don’t have enough cash to run daily operations. That’s why, when it comes to cash flow, speed is key.

Unfortunately, many small business owners end up sacrificing speed in favor of more cash, which is a mistake to avoid at all costs.

Understanding the importance of speed over dollars

Say a customer makes a purchase for $1,000. You have two choices: let them pay by card and get the full balance minus card processing fees within seven days or settle on a payment plan, avoid the fees, and get paid in 38 days. Which do you choose?

Most people would go for the monthly instalments to avoid the credit card processing fee, which might tally up to about $30 for every $1,000, for example. But for that $30, you’d be sacrificing an entire month without those funds. From a cash flow standpoint, you’re much better off paying the $30 fee and having that settle in your account in exchange for much speedier access to funds.

Here’s why: receiving cash every seven to 10 days and having it leave every 30 days keeps your business looking pretty, cashflow wise. Cash velocity is crucial in business. To ensure your cash flow comes in quickly, here are some best practices to follow:

Invoice your customers right away

Ultimately, the sooner you invoice, the sooner you can expect to get paid. When you’re prompt with invoicing, it sets the precedence for your customers, showing them you’re serious about collecting payments on time and that you’re keeping organized about when and how much they owe you.

Charge enough for your services or products

Understandably, you want to be affordable for your clients, but not at the risk of short changing yourself. Remember, just because something feels pricey to you doesn’t mean it will to your customer. It’s all about how the customer perceives the value and benefit of what you’re offering.

Bottom line, don’t be afraid to charge your worth , especially if you’re selling a large volume, collecting payments and time, and still struggling with cash flow. That’s probably a strong indicator you’re not charging enough. To learn more about how to calculate your pricing, check out our Complete Guide to Getting Paid .

Re-evaluate operating expenses

If your price point is on target, you’re collecting on time, and you’re seeing a high volume of sales but you’re still having trouble making ends meet, it’s probably time to revisit your most routine costs: your daily operating expenses. More than likely, you’re spending on things you could do without. Taking time to re-evaluate expenses this way can help you save dollars, reintroducing more cash flow into your business.

To start, analyze a few months’ worth of bills to figure out which expenditures are the heaviest financial burden on your business:

• Are your utilities too high?
• Are you paying for software you don’t use regularly?
• Are employee salaries eating at a big chunk of your cash flow?

If so, consider energy efficient fixtures to lower utility bills. Or consider reducing your employer headcount. One or a combination of the two could curb costs simultaneously on payroll and extra energy consumption by non-essential staff.

Liquidate old inventory

Stale inventory doesn’t bode well for you or your business. Meaning you should only order what you need, when you need it. But if it’s too late for that, then it’s time you take action to release trapped cash. For instance, you could knock down prices, offer special financing options or extend a bonus to salespeople who help sell idle inventory.

Pay vendors at the right time

As a business owner, you’ll be juggling multiple payments at once. Suppliers, your landlord, and credit card companies will account for a chunk of that cash flow. Although it might be tempting to pay everyone off as soon as you get a large payment in, cash position wise, that’s not the best idea.

Time your payments strategically to make sure you’re not draining your account all at once. Pay too soon and you may miss out on being able to use that cash flow in more lucrative ways, like taking advantage of a steep discount temporarily offered by a particular supplier.

The equipment you use helps determine what you charge. I also looked at my experience within the industry. I'm pretty intermediate so I can charge more than someone who's just starting out. You have to be honest with your experience and how much you've invested. ‍ - Tatiyanna Williams-Britton, TruCreates

Chapter 7: Capitalization and outside sources of cash

Inevitably, you’ll run into circumstances where you’ll need to rely on cash. For instance, you may decide to expand your business, or experience a lull in business when a cash reserve could help you breathe easier. But many entrepreneurs too often make the mistake of not setting enough capital aside to help them through scenarios just like these.

Fortunately, you have several options to get the cash you need, whether you’ve been in business for some time or are just starting out:

Crowdfunding

If you have a business idea that helps solve a problem, is innovative, or appeals to the masses, crowdfunding could be the perfect way to pocket some cash. Kickstarter, Indiegogo, and Crowdfunder are popular crowdfunding sites that connect you to individual contributors. In essence, you set a fundraising goal and raise funds from people who support your idea.

One thing to bear in mind is that some of these sites have strict stipulations, like only giving you the full amount of donations raised if you meet your complete funding goal. So, make sure you go through their guidelines and terms carefully.

Consider cash-back credit cards

Credit cards are a great way to create float and build credit for your small business. If you’re already spending a substantial amount on credit cards and are diligent about paying off your balance, you might qualify for a rewards card. This means you can get money back just for using your card to make purchases you’re already making.

As long as you’re a responsible consumer and prompt about making payments on time and in full, rewards cards and credit cards for small businesses can be a great win-win for you and your business’s cash flow.

Apply for a loan

Loans are probably the most natural option you think of if you need additional cash. Fortunately, there are many types you can choose from based on your business needs, including:

• Invoice factoring : With this option, a third party, called a factor, buys outstanding invoices from you at a discount. As these invoices come due, the factor collects on them. In the meantime, you walk away with a stash of cash that you can use however you want. This is a more instantaneous way for businesses to fulfill cash flow needs.

• Cash-flow loans: This is where the bank lends you money using your expected cash flow as collateral for the loan. Cash flow loans might be something you consider when you need working capital right away but don’t expect to see it in your cash flow until much later.
• Taking on a partner with capital: This option allows you to take on a silent partner who invests in your business without interfering in its daily operations. In return, you promise them a stake in your business. This is certainly an option worth considering if your business is profitable and you have the luxury of relinquishing a small part of your profits.
• Bank loans: If none of the above sound like the right fit for you, you could go the traditional route and consider personal and small business loans. A professional banker can present you viable options based on your credit situation and business needs.

Always practice caution before deciding to take on any debt. If you’re already struggling financially or in a considerable amount of debt, shouldering a heavier financial burden will only worsen rather than help your situation. In that case, your best bet is to speak to a financial expert to determine the best course of action for you and your business.

Learn how to find the right loan for your business, read up on finding a small business loan .

Open a business savings account

Once you have a solid stash of cash, it’s time to find the right home for it. You probably already have a checking account where you draw funds and write checks from, but if you want to safeguard your cash, your best bet is to open a business savings account. This way your funds will remain segregated so you don’t accidentally dip into your rainy day/investment cash. Plus, savings accounts usually offer a slightly higher interest rate, so you’ll see your money grow a little faster, even if it’s by pennies and nickels.

Chapter 8: Adjusting your business for a cash flow shortage

A cash flow shortage can set you back months. Even worse, it can make it difficult for you to meet your accounts payables for employees, vendors, and your landlord.

It takes skill to adjust your business against a cash flow shortage, but it’s not impossible. Here are some dos and don’ts to consider if you find yourself strapped for cash:

Don’t stop marketing and promotion

Unless you’re maxed out to the brim on your capacity to take on new clients, there’s no such thing as over-marketing. In fact, marketing done right is what can break you out of a rut and help kick start sales and curb your cash shortage. That’s why, when it comes to eliminating expenses, marketing should be one of the last things on your hit list.

That said, marketing is only important if it’s effective. If you’re not seeing an uptick in foot traffic from your efforts, it’s probably time to revisit your strategy.

Revisit your invoicing process

If you’re already sending your invoices on time, there is still something you can do to bring in funds faster. For instance, try shortening the length of time that a payment is due upon receipt of an invoice.

A simple adjustment like this can help you see cash sooner and throughout the month instead of in one big chunk at the end.

Understand your spending habits

Keeping tabs on your spending is the most effective way to tackle a cash shortage. But when you’re tallying up your expenditures, take it one step further and categorize them to see which area of spend is eating away the most at your dollars.

Using software like Wave eliminates a lot of the manual process and saves you time. For example, Wave’s reporting features give you a glimpse into your most frequent spend categories so you can quickly figure out where you’re putting the most money.

Why did you pay more in payroll one month? Why did your food costs increase another month? Once you have the answers to your why, you can come up with a game plan for the future.

Compare competitors

If you’ve done a deep dive into your business but you’re still not sure where you’re missing the mark on spending, it might be time to do a comparison with your competitors. For instance, if you run a dealership, probe another car dealer to see where they’re spending the most. This is a particularly feasible option if you have friends in the industry. If you don’t, you can connect with some on platforms like Meetup , which allows you to collaborate with others in your industry.

Another idea is to find an accountant who has experience working the books of people in your industry. Without compromising the identity of clients, they can clue you in about average spend in different categories so you can compare how far off the mark you are.

Cut back on your business budget

Analyzing your business expenses allows you to see which ones are necessary and which ones are unnecessary. Prioritize expenses that are non-negotiable (utilities, supplies, etc.) and cut back or delay ones that aren’t. For more information on slimming down your budget, read our tips on managing your business finances .

Now that you know how to optimize your business around cash shortages, let’s talk about common cash flow mistakes business owners often make and how you can avoid them.

Chapter 9: Biggest and most common cash flow mistakes to avoid

It’s common to make cash flow errors when you’re a new business owner. Here are the most common ones and how you can avoid them:

Being too optimistic

Business owners by nature are optimists. But when it comes to cash flow, that attribute can be a downfall. For instance, don’t spend too much in hopes that you’ll make it up tomorrow.

When you’re starting out, it’ll be tough to gauge how much you can realistically expect to make. Instead, partner with a mentor or industry expert to gain a sense of what you can anticipate in terms of cash flow. If you feel brave enough, request a peek at their cash flow statements and do a cash flow analysis. To safeguard your expectations, subtract 10-15% to account for potential variations or shortfalls.

Overspending too soon

One way to avoid spending too much is by creating a business plan where you map out which milestones you should meet before you make certain investments. You can also create a budget for each. Staggering your purchases over time will give your business an opportunity to “heal” as you spend and grow cash flow at a healthy pace.

Accumulating too many past-due receivables

Making a sale is exciting, but that excitement can quickly dwindle when customers don’t pay on time. Being on the lookout for new clients and sales is a good thing, but make sure you’re also keeping an eye on outstanding receivables that are plugging up your cash flow.

Be regular about tracking invoices, sending reminders, implementing penalties and embracing stringent measures to collect payments on time. Past due receivables are the start to a slippery slope of cash flow issues.

Not using a cash flow statement to anticipate your budget

Your cash flow statement is probably the single most powerful tool you have in your arsenal. It’s particularly invaluable when it comes to helping you plan and prepare for cash flow surges and setbacks.

For instance, without the help of a cash flow statement, you could find yourself caught off guard by a seasonal dip in business. And if you happen to fall behind in payments because of it, you could cause damage not only to your reputation and relationships but also to your credit and financial standing.

Not having enough of a cash buffer on hand

Many small business owners enter the business realm with little to no reserve for rainy day funds. To avoid this dilemma, a good best practice is to have at least two months of operating expenses in your business savings account. This way, even if you experience unexpected dips in business or stalls with cash flow, you’ll have ample reserves in place to protect yourself.

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The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: “All content on Wave’s blog is intended for informational purposes only. It should not be considered legal or financial advice.” Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.

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Cash Flow vs. Profit: What's the Difference?

• 21 Apr 2020

Cash flow and profit are essential financial metrics in business. Yet, it isn’t uncommon for those new to finance and accounting to occasionally confuse the two terms. Cash flow and profit aren't the same things, and it’s critical to understand the difference between them to make key decisions regarding a business’s performance and financial health.

For investors, understanding the difference between profit and cash flow makes it easier to know whether a profitable company is a good, long-term investment based on its ability to remain solvent in times of economic crisis. For entrepreneurs and business owners, understanding the relationship between the terms can inform important business decisions, including the best way to pursue growth.

Here’s everything you need to know about cash flow, profit, and the difference between the two concepts.

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What is Cash Flow?

Cash flow refers to the net balance of cash moving into and out of a business at a specific point in time .

Cash is constantly moving into and out of a business. For example, when a retailer purchases inventory, money flows out of the business toward its suppliers. When that same retailer sells something from its inventory, cash flows into the business from its customers. Paying workers or utility bills represents cash flowing out of the business toward its debtors. While collecting a monthly installment on a customer purchase financed 18 months ago shows cash flowing into the business. The list goes on.

Cash flow can be positive or negative. Positive cash flow means a company has more money moving into it than out of it. Negative cash flow indicates a company has more money moving out of it than into it.

Types of Cash Flow

• Operating cash flow: This refers to the net cash generated from a company’s normal business operations. In actively growing and expanding companies, positive cash flow is required to maintain business growth.
• Investing cash flow: This refers to the net cash generated from a company’s investment-related activities, such as investments in securities, the purchase of physical assets like equipment or property, or the sale of assets. In healthy companies that are actively investing in their businesses, this number will often be in the negative.
• Financing cash flow: This refers specifically to how cash moves between a company and its investors, owners, or creditors. It’s the net cash generated to finance the company and may include debt, equity, and dividend payments.

Related: Financial Terminology: 20 Financial Terms to Know

The Cash Flow Statement

Cash flow is typically reported in the cash flow statement , a financial document designed to provide a detailed analysis of what happened to a business’s cash during a specified period of time. The document shows different areas where a company used or received cash and reconciles the beginning and ending cash balances.

Go to the alternative version .

What Is Profit?

Profit is typically defined as the balance that remains when all of a business’s operating expenses are subtracted from its revenues . It’s what's left when the books are balanced and expenses are subtracted from proceeds.

Profit can either be distributed to the owners and shareholders of the company, often in the form of dividend payments, or reinvested back into the company. Profits might, for example, be used to purchase new inventory for a business to sell, or used to finance research and development (R&D) of new products or services.

Like cash flow, profit can be depicted as a positive or negative number. When this calculation results in a negative number, it’s typically referred to as a loss , because the company spent more money operating than it was able to recoup from those operations.

Types of Profit

• Gross profit: Gross profit is defined as revenue minus the cost of goods sold. It includes variable costs, which are dependent upon the level of output, such as cost of materials and labor directly associated with producing the product. It doesn’t include other fixed costs, which a company must pay regardless of output, such as rent and the salary of individuals not involved in producing a product.
• Operating profit: Like operating cash flow, operating profit refers only to the net profit that a company generates from its normal business operations. It typically excludes negative cash flows like tax payments or interest payments on debt. Similarly, it excludes positive cash flows from areas outside of the core business. It’s sometimes referred to as earnings before interest and tax (EBIT).
• Net profit: This is the net income after all expenses have been deducted from all revenues. Typically, this includes expenses like tax and interest payments.

The Income Statement

Information about a company’s profits is typically communicated in its income statement , also known as a profit and loss statement (P&L). This statement summarizes the cumulative impact of revenue, gains, expenses, and losses over the course of a specified period of time.

The Difference Between Cash Flow and Profit

The key difference between cash flow and profit is while profit indicates the amount of money left over after all expenses have been paid, cash flow indicates the net flow of cash into and out of a business .

Check out our video on the differences between cash flow and profit below, and subscribe to our YouTube channel for more explainer content!

Which Is More Important: Cash Flow or Profit?

Investors and business owners are often in search of a single metric for understanding the health of a company. They want one line item in a financial statement to determine whether they should make an investment or pivot their business strategy. In these instances, cash flow and profit are often pitted against each other. But which is more important?

There isn’t a simple answer to that question; both profit and cash flow are important in their own ways. As an investor, business owner, employee, or entrepreneur, you need to understand both metrics and how they interact with each other if you want to evaluate the financial health of a business.

For example, it’s possible for a company to be both profitable and have a negative cash flow hindering its ability to pay its expenses, expand, and grow. Similarly, it’s possible for a company with positive cash flow and increasing sales to fail to make a profit—as is the case with many startups and scaling businesses .

Profit and cash flow are just two of the dozens of financial terms, metrics, and ratios that you should be fluent in to make informed business decisions. By gaining a thorough understanding of key financial principles , it’s possible to advance professionally and become a smarter investor or business owner.

Are you interested in gaining a toolkit for making smart financial decisions and the confidence to clearly communicate those decisions to stakeholders? Explore our online finance and accounting courses and discover how you can unlock critical insights into your organization’s performance and potential. To find out which course is best for you, download our free flowchart .

This post was updated on February 2, 2023. It was originally published on April 21, 2020.

Data Tables

Company a - statement of cash flows (alternative version).

Year Ended September 28, 2019 (In millions)

Cash and cash equivalents, beginning of the year: $10,746

OPERATING ACTIVITIES

Investing activities, financing activities.

Increase / Decrease in Cash and Cash Equivalents: 3,513

Cash and Cash Equivalents, End of Year: $14,259

Go back to the article .

Company B - Annual Trial Balance (Alternative Version)

September 28, 2019 (In thousands)

Company B Income Statement

For Year Ended September 28, 2019 (In thousands)

About the Author

Cash Flow Management: Definition

The relevance of the topic regarding cash flow management remains essential in the modern market. Sustainable profit is the main source that contributes to the proper functioning and development of any company as well as a stable financial position. According to researchers, cash flows can be defined as “the amount of cash that a business entity owns and which ensures its efficiency, financial stability, solvency, liquidity, and image” (Soboleva et al., 2018, p. 2035). In other words, it is a set of receipts and payments that are generated by a company’s activities, a dynamic movement of money over time.

In the field of financial studies, considerable attention is paid to the primary purpose of cash flow management. First of all, cash flow is both an influential factor and a consequence of all economic activities of the enterprise in many aspects. Effectively organized financing of a company is one of the most important symptoms of its economic condition. Moreover, it can also be considered a prerequisite for achieving benefits and high results of business performance in general.

Rational formation of cash flows contributes to the process of the implementation of any new policies in a firm. Any failure to gather revenue and to make necessary payments negatively affects several activities, including purchasing raw materials. Furthermore, the financial situation of an enterprise seriously affects the level of labor productivity. For this reason, researchers note that any activity “requires spending money and should be conducted in such a way as to ensure sufficient financial flows” (Sula, 2015, p. 74). By actively and effectively managing cash flows, it is possible to ensure more rational and economical use of a firm’s financial resources that are generated from internal sources. Therefore, it would be easier to reduce the dependence of the enterprise’s development rate on investments from the outside. Negative cash flows demonstrate unfavorable financial health and repel possible investors, where, on the contrary, satisfactory cash flow rates validate and secure a company’s position in the marketplace. Therefore, by ensuring a stable financial status, more assurance is created for the enterprise’s ability to pay its full expenses.

In addition, the factor of cash flow should be taken into account when assessing financial conditions of a company, since it is an important financial lever that can guarantee the acceleration of the capital turnover of the enterprise. By developing the flow of money through effective management, a company can increase the amount of profit generated over time. Proper synchronization of cash receipts and payments can be achieved during the process of managing, which in the long run, eliminates the factor of bankruptcy and is another determinant considered by analysts. Predicting possible future revenue and payments can be conducted in the form of analytical tables. After analyzing the number of net cash flows, necessary measures should be taken to optimize cash management in a company as in that way a specialist is able to provide a full idea of company’s financial state.

In 2012, Ford Motor Company released a report that contained information about changes in its financial situation. In general, the firm indicates that “execution of One Ford plan has generated significant positive automotive operating-related cash flow in recent years” (Ford Motor Company, 2012, p. 18). In order to be specific, it must be noted that by 2012 the gross cash has raised up to 24.3 billion dollars from 20.5 billion dollars in 2010 (Ford Motor Company, 2012). Moreover, even though their capital expenditures have also grown from 4,092 million dollars in 2010 up to 5,488 million dollars, the amount of short-term debt reduced. These outcomes suggest that while the spending of the company significantly increased during these two years, Ford still managed to generate positive cash flow.

Stable cash flow of the company is a determinant of company’s stability on the marketplace. Cash flow statements are of great importance while assessing a company’s financial status. A new approach to financial plan execution by Ford Motors is a prominent example of a significant improvement of cash flows in the short span of time, which must not be overlooked.

Ford Motor Company. 2012 Annual report – Profitable growth for all, Ford Motor Company [PDF document]. Web.

Soboleva, Y. P., Matveev, V. V., Ilminskaya, S. A., Efimenko, I. S., Rezvyakova, I. V., & Mazur, L. V. (2018). Monitoring of businesses operations with cash flow analysis. International Journal of Civil Engineering and Technology , 9 (11), 2034-2044.

Sula, V. (2015). Cash flows management at the enterprise level. Economie şi Sociologie , (1), 74-77.

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