What is cash flow?
Cash flow is the money that flows in and out of a business. For example, when a customer purchases goods, money is coming in, and when a company pays expenses, such as rent or taxes, cash is going out. Whether you’re starting a business or running one, controlling your cash flow is so important as it can be compared to the blood flow through the heart. A lack of cash can be devastating and shut down any operation. Tracking cash flow is an important part of business bookkeeping work.
For shareholders, a company’s value is determined by positive cash flow and long-term free cash flow, which is money generated by a business after subtracting any cash that went to capital expenditures. Also known as CapEx, capital expenditures are funds used by a business to undertake new projects or investments for its operations. These aforementioned measures take part in the assessment of a company’s overall profitability.
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Types of cash flow
To have a better understanding of cash flow, you’ll need to look at its different categorizations. Each one describes a specific scenario of money coming in and going out.
Cash flow from operations (CFO)
Cash flow from operating activities (CFO) is the amount of money a company brings in through its regular business operations. This can be producing and selling goods or services to customers and is recorded on a business’s cash flow statement.
Cash flows from investing (CFI)
Cash flow from investing (CFI) is the amount of money generated or spent from investment-related projects. These include purchases, sales and acquisitions of assets. While there could be negative cash flow from investing activities, sound investments that are good for the company can lead to positive cash flows in the long-term.
Cash flow from financing (CFF)
Cash flow from financing (CFF) is a part of the cash flow statement that shows the net flows of cash used to fund a company. These involve transactions such as debt, equity and dividends. Furthermore, CFF lets investors understand a business’s leverage.
The main takeaway from this is that effectively managing your cash flow is essential to running a business and your small business accounting. In the long-term, this translates into a company’s value, profitability and financial standing.