What is Cash Flow?

Your company simply fails without sufficient cash flow. A cash flow cycle describes how much money flows through a business, think of it as a swimming pool, if you want the water to rise you simply add more water and prevent it from leaking out, the more water that flows in and the less that flows out, the higher the water level, income and expenses work in the same way.

When more money is coming into the company than leaving, you are generating positive cash flow, if more money is being spent than income being received, you are then experiencing negative cash flow. Bear in mind if you’re experiencing negative cash flow this doesn't mean you are going to suffer losses, because cash flow is vibrant.

Receivables are promises of payment, they don’t translate into cash until the promise is fulfilled, the more quickly this is turned into a payment the better your cash flow.

Debt is a promise you make to pay someone at a later date, debt is attractive because you can benefit from a purchase now while holding onto your cash until later. The later you pay the more cash you have at your disposal, debt can be useful but, most debts cost more money because of interest which you should treat as another type of expense.

A cash flow statement covers a period of time the shorter periods, like days and weeks, are useful for making sure the company doesn’t run out of cash. Longer periods, like months and years are more useful for scrutiny and performance over time.

Money tends to move in 3 core areas:

• Operations (Sales and Overheads)
• Investing (Collecting dividends and paying for capital expenses)
• Financing (borrowing money and paying it back)

Accountants calculate cash flow in different ways, the most popular of reports is:

• Free cash flow = Operating Cash Flow – Capital Expenditures
• Operating cash flow = Earnings before interest & Tax + depreciation + Amortisation – taxes
• Net cash flow = Operating cash flow + cash flow investments + cash flow financing