Cash flow is a term used for the difference between payments and receipts in a period. Positive cash flow is the sign of a healthy business.
If you have a positive cash flow, your company will be considered liquid, meaning you have enough money to cover your costs.
To calculate it, you look at a business’ expenses and income.
What is a cash flow analysis?
A cash flow analysis shows the financial health of a company: It shows whether the company has had a profit or a loss in the period you’re looking at. Since all receipts and payments are included this is useful for, for example, budgeting.
What to include in the analysis
When you calculate cash flow, you include expenses such as operating costs, taxes, and wage costs. Income includes operating income and financial income, such as from interest and stocks.
The formula looks like this:
Cash from operating activities ± cash from investment activities ± cash from financing activities
- Cash from operating activities are transaction related to the core business operations, such as revenue from sales and cash paid to suppliers.
- Cash from investment activities are transactions related to the purchase and sale of long-term assets like property and equipment.
- Cash from financing activities are transactions related to loans and repayments, company stock and dividends.
There are some types of expenses and income that shouldn’t be included, such as the deprecation of assets.
Unlike an annual report, this analysis only includes actual receipts and payments for the period. While unpaid invoices and upcoming payments are included in an annual report, they’re not included in the cash flow analysis.
Download a free template to get started.
What to do if you have negative cash flow
If your business is running with loss—meaning that there are more expenses than income—you should consider making changes to the company, for example scaling back on costly projects, laying off employes, or delaying the purchase of new equipment. You can also consider borrowing more capital.
If this is the case, you should analyze which parts of your business are making money and what you might be able to cut back on. You can for example look into free invoicing software to save money.