Cash Flow

Quick Definition

The movement of money into and out of a business, showing actual liquidity rather than accounting profit.

What is Cash Flow?

Cash flow measures the actual movement of money in and out of your business. Unlike revenue or profit, which are accounting concepts, cash flow shows what's really happening in your bank account.

A profitable company can run out of cash if customers pay slowly or inventory ties up capital. Cash flow tells the survival story that income statements don't.

Types of Cash Flow

• Operating Cash Flow: Cash from core business operations.
• Investing Cash Flow: Cash spent on or received from investments and assets.
• Financing Cash Flow: Cash from or to investors and lenders.
• Free Cash Flow: Operating cash flow minus capital expenditures.

How to Calculate Cash Flow Step by Step

Step 1: Use the simplest method first — check your bank. Your net cash flow for the month is simply: ending bank balance minus starting bank balance (excluding any fundraising proceeds).

• Starting cash: $420,000
• Ending cash: $385,000
• Net Cash Flow = -$35,000 (you burned $35K)

Step 2: Break it into the three categories. For a more useful picture, categorize cash movements:

Operating Cash Flow (core business):

• Customer payments received: +$180,000
• Payroll paid: -$120,000
• Vendors and tools paid: -$65,000
• Rent and utilities: -$12,000
• Operating Cash Flow: -$17,000

Investing Cash Flow (assets and investments):

• New equipment purchased: -$8,000
• Investing Cash Flow: -$8,000

Financing Cash Flow (debt and equity):

• Loan repayment: -$10,000
• Financing Cash Flow: -$10,000

Step 3: Verify the total. -$17K + -$8K + -$10K = -$35,000 ✓ Matches your bank balance change.

Step 4: Focus on operating cash flow. This is the number that matters most. Negative operating cash flow means your core business consumes cash. Negative investing cash flow is often intentional (buying growth). Negative financing cash flow can be positive (paying down debt).

Common mistakes founders make:

• Confusing revenue with cash received (accrual accounting recognizes revenue before cash arrives)
• Not separating the three categories (lumping everything together hides the story)
• Ignoring timing — a profitable quarter can still be cash-negative if large invoices haven't been collected
• Forgetting to exclude fundraising from the analysis (raising $2M and burning $100K isn't positive cash flow)

Why Cash Flow Matters

Cash is oxygen. You can survive losses but not running out of cash. Many profitable startups have died because they couldn't cover payroll while waiting for customer payments.

Investors scrutinize cash flow because it reveals business quality. Companies that convert profits to cash efficiently are more valuable than those with profit that never materializes as cash.

Formulas

• Net Cash Flow = Cash Inflows - Cash Outflows
• Operating Cash Flow = Net Income + Non-Cash Expenses + Changes in Working Capital
• Free Cash Flow = Operating Cash Flow - Capital Expenditures

Example

Monthly cash movements:

• Cash from operations: +$50,000
• Cash from investing (equipment): -$20,000
• Cash from financing (loan payment): -$10,000

Net Cash Flow = $50K - $20K - $10K = +$20,000

Your cash position improved by $20K this month despite capital investments.

Related Terms

Runway

The amount of time a company can continue operating at its current burn rate before running out of cash.
Learn more

Free Cash Flow (FCF)

The cash remaining after operating expenses and capital expenditures, available for dividends, debt repayment, or reinvestment.
Learn more

Working Capital

The difference between current assets and current liabilities, measuring ability to fund daily operations and meet short-term obligations.
Learn more

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