Definition (canonical)
Cash flow is the movement of money into and out of a business over a period of time. Positive cash flow means more money came in than went out; negative means the opposite. It is distinct from profit: profit is an accounting result, cash flow is what actually hits the bank account.
Why profit ≠ cash
A company can be profitable on paper and still fail. The gap comes from timing and non-cash items: you book revenue when you invoice, but receive cash when the client pays (30–90 days later); you buy inventory today that becomes cost only when sold; depreciation reduces profit but takes no cash. Running out of cash — not lack of profit — is the direct cause of most business failures.
The three types of cash flow
| Type | What it covers | Healthy sign |
|---|---|---|
| Operating (CFO) | core business: customer payments in, suppliers/salaries/taxes out | consistently positive |
| Investing (CFI) | buying/selling assets, equipment, acquisitions | often negative in growth (investment) |
| Financing (CFF) | loans, repayments, equity raised, dividends | depends on stage |
The classic read: a mature healthy company shows CFO positive, CFI negative, CFF negative (earns cash, invests, repays/pays out). Startups typically run CFO negative funded by CFF positive — which is what burn rate measures.
How to calculate it
Simplest (direct): `Cash flow = cash received − cash paid` for the period. The indirect method starts from net profit and adjusts for non-cash items and working-capital changes: `CFO = Net profit + depreciation ± change in working capital` That last term is where growing companies get hurt: rising receivables and inventory consume cash even as revenue grows — see working capital.
Free Cash Flow (FCF)
`FCF = Operating cash flow − capital expenditures` — the cash truly available for owners, debt repayment or reinvestment. Investors and acquirers price companies primarily on FCF, not accounting profit.
FAQ
Can cash flow be negative in a good company? Yes — deliberately, during investment or rapid growth. The question is whether it's funded (runway) and whether operating cash flow trends toward positive.
How often should a small business look at cash flow? Weekly for the 13-week rolling forecast; monthly for the full statement. Annual is bookkeeping, not management.
What improves cash flow fastest? Shorter payment terms and disciplined collections, deposits/prepayments, negotiating longer supplier terms, and trimming inventory — before any cost-cutting.
Related: Profit · Working Capital · Liquidity · P&L Statement · Burn Rate Reviewed: 2026-07-11 · Sources: IAS 7