What is Cash Flow?

The U.S. Small Business Administration (SBA) calls cash flow the "lifeblood of a business." Businesses of all sizes, from billion dollar conglomerates to mom-and-pop startups, cannot survive without a healthy cash flow. With a little attention to detail, business owners can monitor their financial trends and identify areas in their budgets that can be trimmed or tweaked to help keep their companies from suffering a cash flow crisis.

What is Cash Flow?
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What Is Cash Flow?

Cash flow is simply the movement of cash in and out of your business. The term "cash" also includes "cash-equivalents," which are assets that you could immediately convert to cash, if needed. Examples of cash-equivalents include your bank accounts, money-market holdings and Treasury bills. Many business owners think their cash flow is simply the result of subtracting their expenses from their revenues, but cash flow involves more than just this profit-and-loss model. Cash flow also includes other considerations, such as accounts payable, accounts receivable, inventory and capital expenditures.

What Is Cash Flow Positive?

Cash flow positive is the state of having more money flowing into your business than going out of your business at any given time – it's a short-term snapshot of your business. This is not the same as long-term profitability, however. You may experience a month that's cash flow positive because of high sales or numerous accounts receivable. But you can quickly get into financial trouble if your sudden windfall from a stellar cash flow positive sales month prompts you to spend too much, too quickly. When this happens, your cash flow positive month may be followed by many cash flow negative months, which could be financially devastating to your business. If your business is seasonal, or if it experiences cyclical ebbs and flows, analyzing your cash flow trends can help you "prepare for a rainy day." The SBA recommends having a financial cushion of three to six months of cash reserves to cover your expenses during lean operating months.

How to Calculate Cash Flow

The <st1:country-region w:st="on"><st1:place w:st="on">U.S. Securities and Exchange Commission (SEC) includes a cash flow statement as one of the four most important financial statements for a business. This statement can help you calculate your cash flow based on long-term changes over time instead of during short-term pockets of time. By dividing your cash flow statement calculations into three parts, you can take a comprehensive look at all areas of your cash flow. This statement can be prepared weekly, monthly, quarterly or for whatever length of time you want to calculate your cash flow. Typically, a business owner prepares a cash flow statement at least once a month. SCORE, a nonprofit organization that helps small business owners, has a downloadable 12-month cash flow statement template on its website. Visit SCORE.org, type "12-month cash flow statement" in the upper right search field and follow the prompts to access this template.

On the first part of your company's cash flow statement, you'll list operating activities, which include the cash flow from net income and losses.

On the second part of your cash flow statement, you'll list your company's investing activities, which include your investment or sales of long-term assets, such as property, equipment and securities.

On the third part of your cash flow statement, you'll list your financing activities, such as bank loan payments and sales of stocks and bonds.

After entering these activities on your cash flow statement, subtract all the amounts of money that flowed out of your company, such as bank loans or inventory purchases, from the cash flow that came into your company, such as payments from your customers. If the net amount is a positive number, you have a positive cash flow for the time period you analyzed. If the net amount is a negative number, you have a negative cash flow.

A Cash Flow Example

Apple's financials give an example of how annual net income and annual cash flow can vary widely. In 2017, Apple's annual net income was $48.4 billion. But for the same year, Apple's net cash flow from its operating activities alone totaled $63.6 billion. The reason for this difference was, in part, because of the adjustments Apple made to its net income, including a $10.2 billion depreciation and amortization adjustment, a $6 billion deferred income-tax adjustment and a $4.8 billion share-based compensation adjustment.