What is cash flow?

What is cash flow?

Cash flow refers to the movement of money into and out of a business over a specific period of time. As a crucial aspect of accounting, it allows businesses to track their financial health and make sure they have the funds to pay for expenses and investments.

Positive cash flow indicates that the money generates more than it is spending. However, negative cash flow may signal that there are financial difficulties. Proper cash flow management is essential for businesses to make informed decisions, plan for the future, and ensure long-term sustainability.

Main types of cash flow

There are three main types of cash flow that businesses need to consider for their accounting processes:

Operational cash flow (OCF)

Operating cash flow refers to the cash generated from a company’s regular business activities, such as sales of goods and services. This type of cash flow is essential for the day-to-day operations of a business and is a key indicator of its financial health.

Investing cash flow (ICF)

Investing cash flow, on the other hand, refers to the cash used for investing in assets like equipment, property, or other businesses. This type of cash flow is crucial for the long-term growth and sustainability of a company.

Cash flow from financing activities (CFF)

Lastly, financing cash flow includes the cash transactions related to the company’s financing activities, such as issuing or repurchasing stock, taking out loans, or paying dividends. Understanding this type of cash flow is important for analysing how a company is funding its operations and expansion.

How is cash flow tracked?

The most common and formal way to track cash flow is through cash flow statements. These financial documents categorise cash flow activities into the different types (for operations, for investing, or for financing activities). These can be done either manually on a spreadsheet or with the help of cloud accounting software.

The best approach depends on the size and complexity of your business. Manual tracking might be suitable for small businesses with a limited number of transactions and a basic need to monitor cash flow. Using cloud software may be more suitable for businesses that make more transactions, though several options now cater to smaller businesses and teams with more affordable subscriptions. 

Regardless of your chosen method, consistently tracking your cash flow is essential for any business. It empowers you to make informed financial decisions, manage your resources effectively, and ensure the long-term financial health of your business.