What is Cash Flow? Definition, Types and Calculation

Introduction

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What Is Cash Flow?**

Cash flow shows how money moves through your business — what’s coming in and what’s going out. It helps you see how much cash you have at any given time, not just what’s on paper. When you’re bringing in more than you spend, that’s positive cash flow — a sign things are going well. But if more money is leaving than coming in, you’ve got negative cash flow, which can create problems if it continues. Tracking your cash flow regularly gives you a clear picture of your financial reality and helps you plan better for the future.

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Why is Cash Flow important?**

Think of cash flow like your business’s heartbeat — steady, healthy cash flow keeps everything running smoothly. It shows whether you have enough cash on hand to pay bills, cover salaries, manage day-to-day operations, and invest in growth. Strong cash flow gives you the flexibility to make smarter decisions, weather tough times, and seize new opportunities when they come.

Types of Cash Flow

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1. Cash Flows From Operations (CFO) Or Operating Cash Flow**

Cash Flow reflects money generated from core operations—sales, services, and everyday hustle. If this is weak, your business has bigger problems.

Think payroll, rent, utilities, and supplier payments. This category tracks all of it. Net income, depreciation, changes in working capital—these are often adjusted to calculate true operating cash flow.

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2. Cash Flows From Investing (CFI)Or Investing Cash Flow**

Cash from buying or selling assets like equipment or property. It’s not regular, but it matters—especially when you’re scaling.

Bought a new delivery van? That’s an investing outflow. Sold some unused equipment? That’s inflow. Negative investing cash flow can be a sign of growth if you're putting money into expansion or R&D.

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3. Cash Flows From Financing (CFF) or Financing Cash Flow**

Deals with raising money or paying it back—loans, issuing shares, paying dividends. Taking a business loan? Inflow. Repaying it? Outflow. Pretty straightforward.

A healthy financing strategy considers the right mix of debt and equity to manage risk and cost.

Positive vs. Negative Cash Flow

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What Does Positive Cash Flow Mean?**

This means your business is bringing in more cash than it’s spending. That’s a green flag. It gives you the flexibility to pay your bills on time, invest in growth opportunities, and build a financial cushion for tougher times.

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Is Negative Cash Flow Always Bad?**

Not necessarily. A temporary negative cash flow might be due to strategic investments, like launching a new product or buying equipment, that can lead to higher future returns. But if your cash flow stays negative over multiple periods without clear ROI, it’s a warning sign that your operations may be unsustainable.

How to Calculate Cash Flow

Simply put, cash flow tells you how much cash you're left with after managing all your income and expenses. The basic formula looks like this:

Cash Inflows - Cash Outflows = Net Cash Flow

Example:
If your business earned ₹10,00,000 from sales and spent ₹3,00,000 on rent, salaries, and supplies,
Net Cash Flow = ₹10,00,000 – ₹3,00,000 = ₹7,00,000

But when you're analysing it more closely, especially for a business, you’ll want to break it down into specific categories:

Operating Cash Flow + Investing Cash Flow + Financing Cash Flow = Net Cash Flow

Example:
Let’s say:

• Operating Cash Flow = ₹3,00,000
• Investing Cash Flow = –₹50,000 (spent on new equipment)
• Financing Cash Flow = ₹1,00,000 (from a business loan)
  Then,
  Net Cash Flow = ₹3,00,000 – ₹50,000 + ₹1,00,000 = ₹3,50,000

This version gives a clearer picture of where your money is coming from and where it's going.

How to Analyse Cash Flows

Understanding how to read and interpret your cash flow is just as important as calculating it. Here’s how to break it down:

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1. Compare Cash Flow from Different Activities**

Examine how operating, investing, and financing cash flows relate to one another. For example, it's important to know whether you are generating enough cash from your business operations to cover both investments and debt repayments. If not, can this situation be maintained over time?

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2. Check the Trend Over Time**

Are your cash flows improving month over month or year over year? A single instance of positive cash flow might seem promising, but consistent growth is a stronger indicator of long-term financial stability.

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3. Align With Your Business Goals** Is your cash flow supporting your goals, like expansion, hiring, or launching a new product? If your strategy isn’t backed by actual cash, it may need rethinking.

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4. Watch for Red Flags

Large swings in cash flow, especially in operating cash, can indicate instability. Frequent reliance on financing inflows might suggest trouble keeping up with expenses.

FAQs About Cash Flow

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How Are Cash Flows Different From Revenues?**

Revenue is what your business earns from selling products or services. Cash flow refers to the real-time movement of cash coming into and going out of a business or individual’s finances. You can have high revenue and still run out of cash if payments are delayed.

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What Is the Difference Between Cash Flow and Profit?**

Profit is your total earnings after deducting expenses from revenue. Cash flow is all about liquidity—how much cash do you actually have? Being profitable doesn’t mean you have cash flowing. Cash flow helps you evaluate that.

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What Is Free Cash Flow and Why Is It Important?**

Free Cash Flow (FCF) represents the cash remaining after a company has covered its operating expenses and made necessary investments in capital expenditures. It’s a strong indicator of financial health and flexibility, used for reinvestment or rewarding shareholders.

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Why Is the Price-to-Cash Flows Ratio Used?**

This ratio helps investors assess if a stock is undervalued or overvalued compared to its actual cash generation. It’s especially useful when net income is affected by non-cash items.

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Do Companies Need to Issue a Cash Flow Statement?**

Yes—public companies are legally required to. For private businesses, it's not mandatory, but it’s a smart move. It gives clarity, helps with forecasting, and keeps you ahead of surprises.