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At first glance, the term cash flow seems very straightforward. However, there are many intricacies that surround it. Not to mention that different types of cash flow exist, and you need to follow specific advice to manage it.
Genome’s team has prepared an article that covers the main things about cash flow that businesses should be aware of. Find out more below.
Cash flow: meaning of the term
In terms of business financial operations, cash flow is the movement of money into and out of the company’s bank accounts. The net amount of funds moved during cash flow is calculated by certain periods – usually monthly.
Cash flow can be divided into two subcategories:
Cash inflow refers to companies receiving money. Multiple sources generate cash inflow, for example, investment income, revenue from selling products and services, sale of assets, etc.
Cash outflow refers to situations when companies have expenses. Such cases include payrolls for employees, taxes, operational expenses, marketing campaigns, and so on.
Businesses need cash flow management instruments in place to ensure that there’s enough money available to cover expenses, investments, and other financial obligations.
As mentioned previously, cash flow consists of cash inflow (money that a company receives) and cash outflow (money that a company spends). But all these movements of funds can be broken down into several types:
Cash flow type
Cash flow from operations
Cash flow from investing
Cash flows from financing
Cash flow description
It is a type of cash flow representing inflows and outflows a company generates through its general operational activity. These are day-to-day operations, such as selling goods or providing services, after accounting for expenses related to those operations.
This type of cash flow is linked to the funds that a company generates from investments or expenses into investment assets. Such cash glow doesn’t correspond with general operations but is a result of buying/ selling property, equipment, securities, etc.
In this case, the cash flow is linked to a company’s financial activities. In simpler terms, it is a movement of funds between the said company and its investors, owners, and creditors. Examples include raising capital, repaying debts, distributing dividends to shareholders, etc.
Cash inflow example per type
A clothing manufacturer created a new spring collection and sold it in its stores.
The farm owner decides to sell a piece of land as it no longer brings in the desirable profit. The money he receives from selling the land will be considered an investment.
A tech company wants to expand and needs to raise capital. To do so, it starts offering 12 000 new shares to potential investors. The money it receives from investors will be a result of cash inflow from financing.
Cash outflow example per type
The same clothing manufacturer paid salaries to its employees that designed and tailored the collection.
A convenience store wants to open a new subsidiary in another town. To do so, it takes a loan from a bank to build the subsidiary. As a result, the store will need to pay interest fees and loan repayments.
A marketing agency is on the rise and decides that it is time to return a loan it took for its development purposes. It repays a loan of 100 000 euros, which is considered a cash outflow.
Cash flow formulas you need to know
Now that you are aware of the different types of cash flows, we can take a look at some of the cash formulas you will likely need as a business owner.
Net cash flow formula
This is the most basic and easy formula you will need when dealing with cash flow calculations. Essentially, net cash flow represents the difference between the inflows and outflows a business had in a set period.
Let’s see how the formula works. For example, let’s imagine there’s a company called ABC789. Here’s its monthly cash flow:
Total cash inflow: 354 000 euros
Total cash outflow: 189 000 euros
To calculate the net cash flow, you simply need to subtract the cash outflow (189 000 euros) from the cash inflow (354 000 euros). In this case, the net cash flow is 165 000 euros.
Cash flow from operations formula
To calculate your cash flow from operation (say, per month), you will need three key metrics, which are net income, non-cash expenses, and change in working capital.
Let’s once again take our imaginary ABC789 company for a formula example:
Net income: 289 000 euros
Non-cash expenses: 23 000 euros
Change in working capital: 45 000 euros
The formula: take the net income (289 000 euros), add non-cash expenses (23 000 euros), then subtract the change in working capital (45 000 euros). The cash flow from operations is 267 000 euros.
As in the case of the previous cash flow formula, you will need to know some of the numbers to calculate it. These are the purchases and sales of property, equipment, other businesses, and marketable securities.
Getting back to our example of ABC789, its figures are the following:
Purchases and sales of property and equipment: 73 000 euros
Purchases and sales of other businesses: 103 000 euros
Purchases and sales of marketable securities: 21 000 euros
To calculate the cash flow from investing, you simply need to add all these metrics. Thus, 73 000 + 103 000 + 21 000 is 197 000 euros.
Cash flow from financing formula
Last but not least, we need to deal with the cash flow from financing formula. To calculate it, a company needs to know the sums of dividends it paid, inflows from issuing equity or debt, and repurchase of debt and equity.
Here are the numbers for ABC789:
Dividends paid: 7 000 euros
Inflows from issuing equity or debt: 59 000 euros
Repurchase of debt and equity: 8764 euros
To calculate the formula, take the dividends paid (7 000 euros) and add repurchase or debt and equity (8764 euros). Then take the inflows from issuing equity of debt (59 000 euros) and subtract from it the sum that you received from the previous equation (15 764 euros). The cash flow from financing formula is 43,236 in this case.
What is a cash flow statement? Examples of it
A cash flow statement is a financial statement that shows and summarizes the cash movement of funds that come in or go out of the company. It also includes ongoing investment operations and debt payments.
A cash flow statement presents a clear picture for owners and investors about all the transactions that go through the business. This statement helps in understanding how much money you have for future financial operations and expenses and allows avoiding problems linked to those.
Overall there are 3 different sections of the cash flow statement: operating, investing, and financing. Together, they create a net cash flow.
Let’s see how this statement looks using an imaginary ABC789 company. All the figures are made up. Note that figures in brackets are considered expenses.
ABC789
Cash Flow Statement
Green Street, Big City, ST 00000
For the year ending:
12/31/2022
12/31/2023
Cash at beginning:
€1,000,000.00
€980,761.00
Cash at ending:
€980,761.00
€4,001,103.00
OPERATING ACTIVITIES
2022
2023
Net Income
€450,000.00
€1,450,500.00
Depreciation and amortization
€150,020.00
€300,000.00
Deferred taxes
€(45,360.00)
€(80,258.00)
Other funds
€112,000.00
€185,000.00
Accounts receivable
€110,120.00
€(320,100.00)
Accounts payable
€125,178.00
€150,200.00
Other assets/liabilities
€(180,000.00)
€(75,800.00)
Inventory
€(8,521.00)
€(12,500.00)
Net cash flow from operations
€713,437.00
€2,237,242.00
INVESTING ACTIVITIES
Capital expenditures (property, plant, and equipment)
€(250,000.00)
€(280,000.00)
Net acquisitions
€(125,500.00)
€(20,600.00)
Sale of fixed assets and businesses
€0.00
€0.00
Collection of principal and making loans to other entities
The cash flow definition is the following: it is a movement of funds within the company’s accounts as a result of its financial activity. It consists of cash inflows – when money comes into the company’s account, and cash outflows – when money is expensed from the account.
What is cash flow analysis?
Cash flow analysis examines the movement of a company’s money over a specific period. It involves tracking the sources of cash inflow, such as revenue from sales or investments, and the uses of cash outflow, like expenses and debt repayments. A cash flow statement is a valuable tool for cash flow analysis.
What is an example of a cash flow?
One of the most common examples of cash flow inside a business is its day-to-day operations. For instance, in a month, a company earned 124 000 euros from sales of merchandise, which is considered a cash inflow, but spent 86 000 euros on payroll, which is a cash outflow.
What are the 3 types of cash flows?
The three types of cash flow are cash flow from operations, investing, and financing.
Does cash flow mean profit?
No, they are different. As explained prior, cash flow displays the movement of money in and out of a business’s account. Meanwhile, profit is the amount of funds a company is left with after all the expenses are deducted.
How do I calculate cash flow?
You can do so by using the formulas we presented in our article. To calculate the net cash flow, you need to subtract cash outflows from cash inflows.
Why is cash flow important for businesses?
Cash flow analysis and management are crucial, as they help businesses to ensure they can cover daily operational expenses, repay debts on time, and seize growth opportunities.
