What Is Cash Flow in A Business? Business Finance Basics

Elie Toubiana
May 4, 2022

Want to make sound financial decisions for your business? You're going to run into a whole world of new terms. One you will hear often is "cash flow." 

Without understanding cash flow, you may not be able to grow, succeed, and meet your financial obligations.

Luckily, we will discuss what cash flow is in a business, how to analyze it, and why it is so crucial to your company’s success. By the end of the next seven minutes, you'll know everything you need. Let's go!

What is Cash Flow?

Operating cash flow is the movement of money in and out of a business. It is calculated by subtracting outflows (cash spent) from inflows (cash received).

This figure tells you how much cash your company has available to pay its bills and invest in new opportunities. Healthy cash flows are essential for any business, as it allows you to cover costs, reinvest in your company, and plan for the future.

Free Cash Flow

Free cash flow is determined by subtracting the value of your capital expenditures from your operating cash flow.  This figure represents the cash available to pay dividends, repay debt, and make growth investments. In publicly traded companies, this is an essential metric for shareholders.

What is Negative Cash Flow?

Negative cash flow occurs when a company's operating expenses (cash outflow) exceed its revenue. This can be due to several factors, such as low sales volume or high costs. When a business is in negative cash flow, it will often need to borrow money or sell assets to cover its expenses. Unfortunately, the interest payments that come with it can often worsen the problem.

What is Positive Cash Flow?

Positive cash flow occurs when a company's revenue exceeds its expenses. This indicates that the company is making more money than it is spending, and it has more cash available to reinvest in the business or pay down debt. It's a desirable situation for any business owner.

Cash Flow vs. Net Income

It is important to note that cash flow and net income are different. Net income measures a company's profitability, while cash flow measures its liquidity.

How to Analyze Your Cash Flow

Cash flow analysis determines whether a company has enough cash to cover its expenses. You can do this analysis on a monthly or annual basis, and it takes into account both cash inflows and outflows.

To perform an analysis, you will need to track the following on your financial statements:

  • Cash receipts (money coming in)
  • Cash payments (money going out)
  • Accounts receivable (amounts owed to the company by customers)
  • Accounts payable (amounts owed to suppliers)
  • Long-term debt (money a company has borrowed that needs to be repaid over a long period)

Don't worry — this won't be a manual process. Cash flow management tools can help automate your work. If that isn't an option, you can find plenty of these numbers on your income statement!

Why Is Cash Flow Important?

Cash flow is one of the most critical indicators of a company's financial health. It tells you whether your business generates enough income to cover its costs and grow. A healthy cash flow allows you to make long-term plans for your company and avoid liquidity problems.

Consult with a financial advisor if you're unsure how healthy your company's cash flow is. Financial advisors can assist you with tracking your cash flow and making adjustments where necessary. By understanding cash flow and taking steps to improve it, you can put your business on the path to financial success.

How to Calculate Cash Flow

To start calculating cash flow for your business, you need to know its revenue and expenses. Revenue is the total amount of money a company brings in from sales and other sources. (You shouldn't include assets you can't spend right away, like accounts receivable). Expenses are the costs of doing business, including rent, payroll, supplies, and marketing.

To calculate operating cash flow, simply subtract working capital expenses from net income. This will give you a snapshot of the cash your company has available to cover its costs. If this figure is negative, it means your company is spending more than it is making. You'll need to take steps to improve your cash flow if you want your business to be successful.

Factors That Affect Cash Flow

Several factors can affect your company's cash flow, including sales volume, pricing strategies, and inventory levels. It is essential to be aware of these factors and make adjustments to maintain positive cash flows.

If you're having trouble with your company's cash flow, don't worry! There are steps you can take to improve it. For instance, you could renegotiate terms with your suppliers or find new sources of financing. By understanding what cash flow is and taking action to improve it, you can help ensure the success of your business.

How to Read a Cash Flow Statement

Now that you know what cash flow is and why it's important, let's look at how to read a cash flow statement. This document shows how much money has come in and gone out of your business over a specific period of time. It can help track your company's financial health and make future projections.

Cash flow statements are divided into three sections: operating activities, investing activities, and financing activities.

  • Operating activities: shows the cash generated or used by the primary operations of your business.
  • Investing activities: details any money spent or earned on investments, such as buying new equipment or stocks.
  • Financing activities: covers any money taken in or paid out relating to financing, such as loans or dividends.

By understanding these three sections, you can get a clear picture of how your business is doing financially. You can also use the cash flow statement to forecast future cash flows and make sound financial decisions for your company.

Run Your Business Like a Pro Today

As a business owner-operator, managing the monthly cash flow in and out of your bank account is crucial to your operations. You need to be able to look past the day-to-day and see the big picture. Luckily, ZenBill can help.

ZenBill helps you save time managing invoices and payments so that you can spend more time on what you love. With an intuitive UI, in-depth functionality, and fast integration with your stack, ZenBill makes it easy for businesses to pay and get paid.

Curious to learn more? Schedule a demo to learn more today!

Frequently Asked Questions

What is cash flow in simple terms?

Cash flow is the movement of cash in and out of a company. It tells you how much money your business has available to pay its bills.

How can I improve my company's cash flow?

You can do several things to improve your company's cash flow, including reducing expenses, increasing revenue, and renegotiating terms with suppliers.

What is a positive or negative cash flow?

A positive cash flow means your business is making more money than it is spending. If your cash flow is negative, it means your business is spending more money than it is making.

What is the difference between revenue and income?

Revenue refers to the total amount of money a company brings in from sales and other sources. Income refers to a company's net profit after deducting expenses from revenue.

What is a cash flow statement?

A cash flow statement is a document that shows how much money has come in and gone out of your business over a specific period of time. You can use it to evaluate your company's financial situation and plan for the future.

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