Table of Contents
When it comes to businesses, cash is constantly moving into and out of the business. But what exactly is business cash flow, how does it work, and why does it matter so much?
Key Points
• Cash flow is the net balance of money moving into and out of a business at a specific point in time, and managing it ensures enough cash is on hand to meet financial obligations.
• Unlike profit, which reflects performance over time, cash flow shows what money is actually available to pay bills and keep a business solvent day to day.
• Positive cash flow means more money is coming in than going out, while negative cash flow signals the reverse — a situation that can threaten a business’s ability to operate.
• A cash flow statement is broken into three sections — operating activities, investing activities, and financing activities — giving a full picture of financial movement.
• Lenders rely on cash flow when approving loans and setting terms, making it a critical measure of a business’s liquidity, sustainability, and overall growth potential.
What Is Cash Flow?
Cash flow is the net balance of cash moving into and out of a business at a specific point in time. Managing a business’s cash flow is essential to ensuring that there is enough cash on hand to pay bills and meet financial obligations. Knowing what cash flow is and how to calculate cash flow is an important part of being a business owner.
Types of Cash Flow
There are a few types of cash flow, including operating, investing, and financing.
Operating cash flow is the net cash generated from a company’s normal business operations. Positive cash flow is required to sustain business growth when a company is actively expanding. This does not include the cash flow from investing. Cash from operating activities can be found on the company’s cash flow statement.
Investing cash flow (also called free cash flow to equity) is the net cash generated from a company’s investment-related activities, like the sale of assets, investments in securities, or the purchase of physical assets like equipment or property. Investing cash flow will often be negative in healthy companies that are actively investing in their businesses.
Financing cash flow is how cash moves between a company and its investors, owners, or creditors. Financing cash flow is the net cash generated to finance the company. It may include debt, equity, and dividend payments.
Cash Flow vs. Profit: What’s the Difference?
Cash flow and profit are two different financial measures for a business. Both are essential in understanding a business’s financial situation. Cash flow measures how money is flowing in and out of a business. Profit is an indication of whether the business is making money over a certain period of time after all expenses are subtracted from the revenue.
Profit reflects performance over time, not what cash is available for use in a business to pay bills and remain solvent. A company can be profitable but still have cash flow problems. For example, a company could report profits while having a low bank account balance because profit includes revenues earned but not yet received, as well as expenses recorded but not yet paid.
What Is Positive Cash Flow?
Cash flow can be positive or negative. Positive cash flow means that a company has more money moving into it than out of it. Negative cash flow means that a company has more money moving out of it than into it.
If your company has cash flow problems, you may be wondering what are cash flow loans. Cash flow loans allow businesses to borrow against future revenue. Cash flow loans can be helpful if you have irregular or seasonal revenue cycles.
How To Read a Cash Flow Statement
A cash flow statement is a type of business financial statement. It is one of the three main financial statements required for most companies, along with the balance sheet and the income statement. A cash flow statement is a financial document designed to provide a detailed analysis of what happened to a business’s cash during a specific period of time. The cash flow statement shows different areas where a company used or received cash and reconciles the beginning and ending cash balances.
The cash flow statement is typically broken into three sections: operating activities, investing activities, and financing activities. Operating activities include cash flow that has been generated after the company delivers its regular goods and services, and includes both revenue and expenses. Investing activities include cash flow from purchasing or selling assets using free cash. Financing activities include cash flow from both debt and equity financing.
How to Improve Cash Flow
If you are looking to apply for small business credit cards, small business loans, business line of credit, or possibly even a small business checking account, the lender will look at your business’s cash flow to determine if your business can repay existing and new debt. Lenders use cash flow as one of the criteria for approving a loan and when determining interest rates and repayment terms of the loan.
If your business cash flow is not high enough, there are ways to improve your business cash flow.
The Takeaway
If you are a business owner, you need to understand what cash flow is and how to calculate it for your business. Just because your company is making a profit doesn’t mean that you have positive cash flow.
Ready to grow your business? SoFi Small Business Loans can give you fast access to the capital you need. Check your eligibility in minutes.
FAQ
What is an example of cash flow?
We can use an example of a bakery’s cash flow. The inflows for the bakery include $20,000 worth of sales in products. The outflows for the bakery include $5,000 for supplies for their products (flour, sugar, etc.), $2,000 for rent, $1,000 for utilities, and $5,000 for employee wages. This means that the cash flow for the month would be calculated by taking the inflow total ($20,000) and subtracting the outflow total ($13,000) to equal $7,000. This $7,000 is the net cash flow for the month.
What is a good cash flow?
A good cash flow includes consistent positive cash inflows that exceed outflows. A good cash flow will also be predictable and reliable, which can allow businesses to plan for expenses and investments.
Why is cash flow more important than profit?
Profit is revenue minus expenses. A company can appear profitable on paper without having cash in hand. Cash flow indicates the actual money available to run a business, pay bills, and sustain operations. Cash flow shows whether a company has enough actual liquidity to pay the things that they need to pay, like rent, salaries, suppliers, etc.
What causes negative cash flow?
Negative cash flow occurs when a business’s expenses exceed its revenue over a specific period of time. Some causes of negative cash flow could include high overhead costs, low profit margins, or customers who pay late.
How is cash flow used to evaluate a business?
Cash flow is used to evaluate a business’s financial standing. Cash flow shows the actual movement of money in and out of the business. Cash flow is used to evaluate a company’s liquidity, sustainability, and growth potential.
Photo credit: iStock/filadendron
SoFi's marketplace is owned and operated by SoFi Lending Corp.Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
SOSMB-Q226-145