What Is Cash Flow?

Bruce Sayer

Last Modified : Aug 19, 2025

Ask any successful business owner the secret to staying afloat—and you’ll likely hear the same answer: cash flow. While revenue may look impressive on paper, it’s cash flow that keeps the lights on, pays employees, funds growth, and ensures resilience through uncertainty.

But what exactly is cash flow, and why is it so important to understand and manage?

In this article, we’ll break down the basics of cash flow, the different types, why it matters, and how to keep it working for your business.

Cash Flow Defined

Cash flow is the movement of money into and out of your business over a specific period of time.

• Cash Inflows: Money received from customers, loans, investors, or asset sales.

• Cash Outflows: Money paid out for expenses like payroll, rent, inventory, taxes, loan repayments, and other operational costs.

At its core, cash flow measures liquidity—how much actual cash you have on hand to meet short-term obligations and opportunities.

Types of Cash Flow

Understanding your financial health means looking at cash flow through three lenses:

1. Operating Cash Flow (OCF)

This is the cash generated from day-to-day business activities, such as selling goods or services. It reflects your company’s ability to sustain itself without relying on outside financing.

2. Investing Cash Flow

This includes money spent or earned from investments like purchasing equipment, buying property, or selling business assets.

3. Financing Cash Flow

This reflects cash movements between your business and external parties like lenders or investors—such as loan proceeds, repayments, dividends, or equity raises.

Formulas to Calculate Cash Flow

There are several ways to calculate cash flow depending on the financial data available and the specific focus of your analysis. Here are the most commonly used formulas:

1. Operating Cash Flow (OCF) – Indirect Method

This method starts with net income and adjusts for non-cash expenses and changes in working capital:

Formula:
Operating Cash Flow = Net Income + Non-Cash Expenses (e.g., Depreciation & Amortization) + Changes in Working Capital

Example:
If your business had a net income of $50,000, depreciation of $5,000, and an increase in accounts payable of $10,000:
OCF = $50,000 + $5,000 + $10,000 = $65,000

2. Free Cash Flow (FCF)

Free Cash Flow shows how much cash a company generates after accounting for capital expenditures. It’s a strong indicator of financial flexibility and value.

Formula:
Free Cash Flow = Operating Cash Flow – Capital Expenditures

Example:
If your operating cash flow is $65,000 and you spent $15,000 on equipment:
FCF = $65,000 – $15,000 = $50,000

3. Cash Flow from Investing Activities

This is often a direct calculation based on your financial statements and includes purchases or sales of physical or financial assets:

Formula:
Cash Flow from Investing = Cash Inflows from Asset Sales – Cash Outflows from Asset Purchases

Tip: This number is often negative in growing companies, as they’re actively investing in long-term assets.

4. Cash Flow from Financing Activities

This reflects changes in debt, equity, and dividends:

Formula:
Cash Flow from Financing = Cash Inflows from Loans or Equity – Loan Repayments – Dividends Paid

5. Net Cash Flow

To calculate your overall net cash flow for a period, sum the cash flows from all activities:

Formula:
Net Cash Flow = Cash Flow from Operations + Cash Flow from Investing + Cash Flow from Financing

This gives you a comprehensive view of whether your cash position improved or declined over a given time frame.

Pro Tip:
Many businesses use cash flow statements generated by their accounting software or CPA, but understanding these formulas helps you ask better questions and make informed financial decisions.

Why Cash Flow Matters

Even profitable businesses can go under if they don’t have enough cash on hand. Here’s why cash flow is so critical:

• Pays the Bills: You need liquid cash to cover operating expenses, taxes, and payroll—even if invoices haven’t been paid yet.

• Enables Growth: Whether you’re hiring, upgrading technology, or expanding, you’ll need cash to invest in future opportunities.

• Builds Resilience: Cash flow cushions you during slow seasons, unexpected downturns, or supply chain disruptions.

• Improves Creditworthiness: Lenders and investors often assess cash flow when evaluating your financial stability.

Positive vs. Negative Cash Flow

• Positive Cash Flow: More money is coming in than going out. This means your business can reinvest, save, and expand.

• Negative Cash Flow: More money is going out than coming in. This doesn’t always mean trouble—many growing companies experience this during expansion—but it must be monitored closely.

The key is to understand your cash position at all times and plan accordingly.

Common Causes of Cash Flow Problems

Even successful businesses can experience cash flow challenges due to:

• Late or extended customer payments

• Overstocked inventory

• Seasonal sales fluctuations

• Poor expense management

• Fast growth without financial controls

Identifying the root cause is the first step to fixing it.

How to Improve Cash Flow

Here are some proven ways businesses can improve cash flow:

• Accelerate receivables: Offer early payment discounts, A/R financing or invoice factoring.

• Negotiate payment terms: Extend payables with suppliers to better align with receivables.

• Monitor expenses: Regularly review and optimize operational costs.

• Use financing strategically: Access working capital through lines of credit, invoice financing, or asset-based lending when needed.

• Forecast regularly: Use cash flow projections to plan ahead and avoid surprises.

Final Thoughts

Cash flow isn’t just an accounting term—it’s a business survival metric.

While profitability shows long-term health, cash flow reflects your day-to-day reality. Whether you’re just starting out or scaling fast, understanding and managing cash flow is essential to making smart financial decisions, navigating uncertainty, and fueling growth.

If cash is king, then cash flow is the kingdom’s heartbeat. Keep it healthy, and your business will thrive.

Bruce Sayer

Bruce is a seasoned content creator with over 40 years of experience across various industries. Since 2013 he has been a dedicated member of the eCapital team, publishing informative articles intended to introduce and guide business leaders through effective financing options.

During this time, Bruce's articles have influenced countless of CEOs and other executives to investigate and often implement specialized funding strategies to achieve stable and flexible financial structures.