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Cash flow describes the movement of cash and cash equivalents into and out of a business over a defined period. It is commonly referenced in financial reporting to reflect how operational activities, asset transactions, and funding arrangements affect a company’s cash position.
Cash flow represents the net movement of cash within an organisation during a specific accounting period, covering operating, investing, and financing activities.
In accounting terms, cash flow refers to the difference between cash inflows (money received) and cash outflows (money paid).
Cash flow information is presented in financial statements to show:
Availability of liquid funds
Timing of cash receipts and payments
Relationship between profits and actual cash movement
Impact of business activities on cash balances
Positive cash flow: Cash inflows exceed cash outflows during the period
Negative cash flow: Cash outflows exceed cash inflows during the period
Example:
If a company earns ₹1,00,000 from sales (inflow) and pays ₹60,000 in salaries and expenses (outflow), the net cash flow is ₹40,000.
Unlike revenue or profit figures, cash flow reflects only realised cash movements recorded during the period.
Cash flow figures are derived from a company’s cash flow statement and are commonly grouped by activity type
| Type of Cash Flow | Formula |
|---|---|
Net Cash Flow |
Total Cash Inflows – Total Cash Outflows |
Operating Cash Flow (Indirect Method) |
Net Income + Non-Cash Expenses ± Changes in Working Capital |
Operating Cash Flow (Direct Method) |
Cash Received from Customers – Cash Paid to Suppliers & Expenses |
Free Cash Flow (FCF) |
Operating Cash Flow – Capital Expenditures |
These formulas are used conceptually to explain cash movements; actual reporting follows prescribed accounting standards.
If operating cash inflow is ₹10,00,000 and total cash outflow is ₹7,50,000, net cash flow equals ₹2,50,000.
If operating cash flow is ₹9,00,000 and capital expenditure is ₹3,00,000, free cash flow equals ₹6,00,000.
Cash flow is classified into three categories based on the nature of business activity.
Cash generated or used in core business operations.
Examples include:
Receipts from customers
Payments to suppliers
Salaries, rent, and utility expenses
Cash related to acquisition or disposal of long-term assets and investments.
Examples include:
Purchase or sale of equipment
Sale of property
Investment in securities
Cash arising from funding activities.
Examples include:
Proceeds from loans or share issuance
Repayment of borrowings
Dividend payments
Together, these categories provide a structured view of how cash moves through an organisation.
Cash flow information is commonly referenced in financial reporting to understand how money moves through operating, investing, and financing activities over a given period. It provides context beyond accounting profit by reflecting actual liquidity and funding patterns.
From an analytical perspective, cash flow statements are reviewed to observe:
Short-term liquidity position
Cash generated from core operations
Funding inflows and repayment activity
Changes in cash performance across reporting periods
Alignment between reported earnings and realised cash movement
Certain indicators are typically examined during interpretation:
Positive operating cash flow reflects net cash generated from business activities
Negative operating cash flow indicates higher operational outflows during the period
Negative investing cash flow is often linked to asset acquisition or long-term investments
Positive free cash flow represents remaining cash after capital expenditure
Period-over-period comparison highlights shifts in cash patterns over time
Together, these observations help place earnings figures within the context of actual cash movement and provide a consolidated view of liquidity trends and financial positioning.
Basis
| Basis | Cash Flow | Income (Profit) |
|---|---|---|
Nature |
Actual cash movement |
Accounting measure |
Includes |
Cash inflows and outflows only |
Revenue and expenses, including non-cash items |
Method |
Cash-based |
Accrual-based |
Focus |
Liquidity position |
Earnings performance |
| Basis | Cash Flow | Revenue |
|---|---|---|
Meaning |
Net cash movement |
Total sales recognised |
Timing |
Recorded when cash is received or paid |
Recorded when a sale occurs |
Example |
Payment received later → no cash flow today |
Sale recorded even on credit |
Revenue recognition does not necessarily correspond to immediate cash receipt.
Cash flow provides a view of realised cash movement across operating, investing, and financing activities. By examining these components together, financial statements present how business activities translate into actual liquidity during a reporting period.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Cash flow is calculated by subtracting total cash outflows from total cash inflows for a given period, based on figures reported in the cash flow statement.
Operating cash flow may be presented using the direct method (actual receipts and payments) or the indirect method (adjusting net income for non-cash items and working capital changes).
There is no universal benchmark for “normal” cash flow. Levels vary depending on business model, industry, and operating cycle.
Cash flow analysis refers to reviewing cash inflows and outflows to understand liquidity patterns and the impact of operating, investing, and financing activities during a reporting period.
Profit reflects accounting earnings, including non-cash items, while cash flow shows actual cash movement recorded during the period.
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