What is Cash Flow?
When it comes to understanding cash flow there are a couple of different things you need to be aware of. Cash flow specifically refers to the amount of cash going in and out of a business. There are three distinct categories of cash flow that each refer to something different:
- Operating cash flow
- Investing cash flow
- Financing cash flow
It is important to understand the difference between these three types of cash flow. Companies take in cash flow from operations; however, investments and financing activities can also produce positive cash flow. Cash flow typically decreases from operating activities, however, can also decrease from investing and financing as well. Overall cash flow is an especially important thing to watch to ensure an understanding of your companies’ financial situation. Often business owners think that if profit is positive that the business is doing fine, but that is not always the case. Cash flow can be just as important if not more important. Knowing your cash flow is crucial to making sure a business can stay running.
Operating Cash Flow
Operating cash flow is the cash spent and received during normal daily activities. Cash flow from operating activities is calculated by taking the money earned from normal business and subtracting the normal expenses from daily business. These cash inflows could be things like revenue from sales, interest received, or royalties. Cash outflows refers to things like operating expenses, wages, and office expenses. Operating cash flow is extremely helpful to know because it can show where you might be spending too much, or maybe you need to raise your prices.
Investing Cash Flow
Investing cash flow involves all the results from changes in investments and long term asset items. This section of the cash flow statement includes all cash spent and received through investment activities. Things that would fall under this would be the purchase or sale of equipment, the sale or purchase of land, and mergers and acquisitions of other companies. To calculate investing cash flow, you add up all the cash from the sale of assets or collected from loans, then subtract the cash spent to buy assets or make loans.
Financing Cash flow
Financing cash flow includes all the cash changes from financing activities. These Financing activities involve cash flows resulting from changes in long-term liability and stockholders’ equity items. The third section of the cash flow statement. Financing cash flow is how a company’s cash moves around its owners, creditors, and investors. Some of the things that financing cash flow includes are:
- Cash borrowed from a lender/bank
- Cash paid back to a lender/bank
- Distribution and Dividend payments to shareholders or owners
- Cash gained through issuing stock or interest in the company to owners
- Repurchase owners’ stock or interest in the company
Net Cash Flow
Net cash flow is the net amount of funds that are gained or lost over a period, e.g., month or a year. Simply put, net cash flow is the amount of cash after considering inflows and outflows from the three areas above: operations, investing, and financing. If a business has extra cash at the end of the period after considering all the inflows and outflows, it will have a positive cash flow. If the cash balance goes down after all the inflows and outflows, it is said to have negative cash flow. Analyzing what is causing negative or positive cash flow is crucial to determining a business’ financial health.
If you have any other questions about cash flow or want to know more about how cash flow is affecting your business clink the link below to get started with Whittaker. We want to make the confusing part of running a business the easy part.
