Cash flow is the movement of money in and out of your business. Learn how to track it, why it matters, and how managing it effectively keeps your business profitable and sustainable.
Knowing the money that moves in and out of your bank account is essential for any business – that’s called cash flow.
Understanding your cash flow is essential for keeping your business running smoothly, paying your expenses on time, and planning for growth.
In this guide, we’ll explain what cash flow is, why it matters, and how to analyze it for a financially healthy business.
What is cash flow?
Cash flow is the state of your business bank account: the money coming in versus the money going out.
It’s the net amount of cash and cash equivalents being transferred in and out of your business over a given period.
Why does cash flow matter?
Cash flow is one of the best indicators of your business's financial health.
Positive cash flow = you have enough liquid assets to cover expenses like salaries, bills, and inventory while also growing your reserves.
Maintaining healthy cash flow keeps your business self-sustaining, helps you pay investors dividends, and provides a buffer against unexpected challenges (like late payments, chargebacks, or sudden costs).
What's the difference between cash flow and revenue?
Revenue is the money your business earns from sales, while cash flow is both your incoming revenue and outgoing expenses.
A company can have high revenue but still struggle if its cash outflows exceed inflows. Cash flow gives a fuller picture of financial health.
Three types of cash flow
Understanding cash flow is easier when broken into three categories:
1. Cash flow from investing
Often abbreviated as CFI, this measures cash generated or spent on investments, such as buying or selling assets or securities.
Negative CFI isn’t bad – it often means you’re investing in growth that could pay off later.
2. Cash flow from operations
Operating cash flow, or CFO, shows money moving in and out due to day-to-day business activities.
It’s a key indicator of your business model’s sustainability.
If you rely on investments or financing to cover operational costs, it may signal that your core operations aren’t generating enough cash.
3. Cash flow from financing
Financing cash flow (or CFF) tracks money from raising capital or paying dividends.
Issuing shares or selling bonds generates positive cash flow, while paying dividends or repaying debt creates negative cash flow (both are normal and part of the business cycle).
Understanding a cash flow statement
A cash flow statement is a financial report that tracks the movement of money in and out of a business over a specific period.
It shows how cash is generated and used across three main areas: operating activities, investing activities, and financing activities.
Cash flow statements help you gauge financial health, see where your money is going, and make informed decisions about managing or investing.
Let’s break down the key terms and metrics you’ll encounter:
Free cash flow:
Free cash flow refers to the net cash your company has left after paying for expenses such as debt and dividends.
It’s a good indicator of how much money is available to reinvest in the business or save as a buffer for future expenses.
A higher free cash flow generally means a healthier, more flexible business.
Unlevered free cash flow:
This measures total free cash flow excluding interest payments, showing your company’s cash position before any financial obligations.
It’s helpful for comparing businesses regardless of how they are financed.
Operating cash flow:
Operating cash flow is the money generated or spent through your core business operations.
This is one of the most important metrics, as it shows whether the business’s main activities are actually producing cash.
If a company relies heavily on investing or financing cash flows to stay afloat, it may indicate operational issues.
Cash flow to net income ratio:
This ratio compares cash flow to net income, which includes non-cash items like depreciation.
A ratio of 1:1 or higher signals that the company is generating real cash and not relying on accounting adjustments or delayed payments to appear profitable.
Current liability coverage ratio:
This ratio measures whether a company can cover its short-term obligations using operating cash flow.
It’s a quick way to check financial stability: if liabilities far exceed cash inflows, it could signal trouble ahead.
Price-to-money flow ratio:
For public companies, the price-to-money flow ratio compares the stock price to the operating cash flow per share (adjusted for capital expenditures).
It provides insight into valuation relative to the actual cash a company generates.
How to calculate your business's cash flow
Calculating your business’s cash flow doesn’t need to be complicated. At its simplest:
Cash flow = total inflows − total outflows.
Here’s how to break cash flow down:
List all cash inflows: Include everything that brings money into your business: sales revenue, investment income, loans received, or any other payments received.
List all cash outflows: Include expenses such as salaries, rent, utilities, supplier payments, loan repayments, and taxes.
Subtract outflows from inflows: The result is your total cash flow for the period. A positive number means your business is generating more cash than it’s spending; a negative number means you’re spending more than you’re bringing in.
Break it down by category (optional but recommended): For a more detailed view, categorize cash flows like this:
- Operating activities: Day-to-day business operations (sales, supplier payments, salaries).
- Investing activities: Buying or selling assets like equipment, property, or investments.
- Financing activities: Loans, equity funding, dividend payments, or stock buybacks.
Analyze the results: Looking at total cash flow is helpful, but the category breakdown tells the whole story:
- Positive operating cash flow: Suggests your core business is healthy.
- Negative investing cash flow: Might reflect investments for future growth.
- Financing cash flow: May show debt or equity changes and their impact on liquidity.
Quick example:
Your small business earned $50,000 from sales and received a $5,000 loan.
→ Total inflows: $55,000
You spent $30,000 on salaries, $10,000 on rent, and $5,000 on supplies
→ Total outflows: $45,000
Cash flow = $55,000 − $45,000
= $10,000 positive cash flow
Supercharge your business management skills with Whop
Mastering cash flow is one of the most practical ways to ensure your business grows and stays afloat.
Whop makes it easy to take control of your business finances while building your skills.
Find ecommerce communities, business workshops, and growth courses designed for entrepreneurs just like you, offering practical advice on managing cash flow, scaling your business, and maximizing profits.
Join Whop today, and learn how to leverage cash flow like a boss.
FAQs
What's the difference between cash flow and profit?
Profit looks at whether a company is actually making money by comparing revenue and expenses, whereas cash flow takes into account liquidity and whether your company has cash on hand to make those payments regularly and on time.
Does a company have to submit a cash flow statement?
Public listed companies have to report a cash flow statement along with other financial documentation and make it public every quarter. This is why we were able to look at recent financials of both Apple and Tesla above, but not Twitter, which is now private (though still subject to certain reporting requirements).
What is the price to cash flow ratio?
Price to cash flow is a metric that looks at a company's stock price relative to operating cash flow per share. It can be a useful tool to analyze companies using their core business operations as a yardstick.
