Cash Flow – what is it?

Cash Flow is a company’s cash flow, i.e. the movement of cash in and out of a company over a specified period. It is one of the key financial indicators that reflects a company’s liquidity and its ability to pay its current obligations. Cash Flow allows you to assess how a company generates cash from its operations, what expenses it has and whether it is able to make planned investments. Cash flow is particularly important because it determines real financial health, unlike the profit shown in the income statement, which is not always equivalent to cash flow.

Cash flow can be divided into three main types: operating, investment and financial

Operating cash flow refers to a company’s core business, i.e., how the company generates and uses cash as part of its day-to-day business operations (e.g., sales of goods, payments for raw materials, salaries). Operating cash flow is critical to maintaining the stability of a company and enables it to cover its ongoing costs.

Investment flows are related to the purchase or sale of fixed assets, such as machinery, buildings, or financial investments. They may reflect investments to expand the business and upgrade infrastructure, which affects future revenue-generating opportunities.

Financial flows result from capital raising activities, such as issuing stocks or bonds, and borrowing or repaying existing liabilities. Financial flows help assess how a company finances its operations and how it repays debts.

Frequently asked questions

1. What are the main types of Cash Flow?

Cash Flow is divided into operating, investment and financial. Operating cash flow refers to inflows and outflows related to a company’s main activities. Investment cash flow refers to the purchase and sale of assets, while financial cash flow includes capital raising and repayment of liabilities.

2. Why is cash flow analysis important?

Cash flow analysis allows a company to understand where its funds come from and how they are used. This allows managers to make better decisions about capital allocation, liability management and planning for future investments. It is a key tool for assessing a company’s financial health.

3. How to improve a company’s Cash Flow?

To improve Cash Flow, a company can try to shorten the collection period of receivables, negotiate longer payment terms with suppliers, reduce unnecessary expenses and better manage inventory. It is also important to optimize operating costs and increase revenues to generate more financial surpluses.