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Explore cash flow to understand how money moves into and out of a business across its operating, investing, and financing activities.
Cash flow is one of the most widely used indicators of a company’s financial health. It measures how much cash enters and leaves a business during a specific period. Unlike profit—which can include non-cash items—cash flow focuses only on actual cash movements, helping businesses understand liquidity, pay bills on time, invest in growth, and avoid financial stress. In simple terms, cash flow shows whether a business has enough money to fund its operations and future goals.
Cash flow refers to the net amount of cash and cash equivalents moving into and out of a business. It reflects the company’s ability to generate cash from operations, manage investments, and meet financial obligations.
Cash flow meaning: the movement of money into (inflows) and out of (outflows) a business.
Purpose: evaluates liquidity, financial strength, and operational efficiency.
Relation to operations: Higher cash flow supports salaries, rent, inventory, and expansion without relying on debt.
Positive cash flow means more cash is coming in than going out; negative cash flow indicates the opposite.
Here are the most commonly used cash flow formulas:
| Type of Cash Flow | Formula |
|---|---|
Net Cash Flow |
Total Cash Inflows – Total Cash Outflows |
Operating Cash Flow (Indirect Method) |
Net Income + Non-Cash Expenses – Increase 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 |
If a business receives ₹10,00,000 and spends ₹7,50,000, the net cash flow is ₹2,50,000.
If operating cash flow is ₹9,00,000 and capital expenditure is ₹3,00,000, the free cash flow is ₹6,00,000.
Cash flow is divided into three major categories:
Cash generated from core business operations.
Examples: cash received from sales, payments to suppliers, salaries, rent.
Cash used for buying or selling long-term assets.
Examples: purchase of equipment, sale of property, investment in securities.
Cash flows related to funding activities.
Examples: loans taken, loan repayments, issuing shares, dividend payments.
Cash flow helps businesses:
Evaluate liquidity and solvency
Plan financial strategies and budgets
Determine capability to repay debt
Make investment decisions
Forecast future cash needs
Assess business performance beyond accounting profit
Cash flow analysis involves studying the cash flow statement to understand whether a company’s cash movements support sustainable growth.
Positive operating cash flow indicates net operational inflows.
Negative operating cash flow may reflect weak operations or high working capital needs.
Negative investing cash flow is usually associated with spending on long-term assets.
Positive free cash flow indicates that the business has excess cash remaining after covering its operating and capital expenses.
Trend analysis helps identify whether a cash flow statement is improving or deteriorating over time.
Consider the following differences:
| Basis | Cash Flow | Income (Profit) |
|---|---|---|
Nature |
Actual cash movement |
Accounting measure |
Includes |
Cash inflows and outflows only |
Revenue, expenses (including non-cash items) |
Method |
Cash-based |
Accrual-based |
Suitable for |
Liquidity analysis |
Profitability analysis |
| Basis | Cash Flow | Revenue |
|---|---|---|
Meaning |
Net cash movement |
Total sales earned |
Timing |
Records when cash is received or paid |
Recorded when sale is made (even on credit) |
Example |
Customer pays later → no cash flow today |
Sale still counted as revenue |
Revenue does not guarantee cash inflow, but cash flow reflects real liquidity.
To maintain healthy cash flow, businesses may:
Monitor inflows and outflows regularly
Adjust payment cycles and credit terms
Maintain adequate liquidity reserves
Plan for seasonal cash variations
Track working capital closely
Use forecasting tools to predict shortfalls
Avoid excessive debt and unnecessary expenses
Effective cash flow management prevents financial stress and supports long-term stability.
Cash flow reflects the true financial strength of any business. It shows whether there is enough liquidity to run operations smoothly, meet obligations, and support future growth. By understanding different cash flow types and tracking them consistently, stakeholders can assess stability, efficiency, and long-term viability.
Key points to remember:
Cash flow indicates a company’s real liquidity position
Operating, investing, and financing cash flows offer a complete financial picture
Regular analysis helps identify trends and potential risks
Higher cash flow supports profitability and long-term growth
Effective cash flow management improves stability and decision-making
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, giving a measure of how much cash is generated or used during a specific period, including the option to compute operating cash flow through direct or indirect methods.
The two methods of calculating cash flow include the direct method, which records actual cash receipts and payments, and the indirect method, which adjusts net income for non-cash items and changes in working capital to arrive at operating cash flow.
The four pillars of cash flow comprise operating cash flow, investing cash flow, financing cash flow, and free cash flow, each representing a different aspect of how cash moves within a business.
A normal cash flow refers to a pattern where an initial cash outflow, such as an investment or project cost, is followed by a series of cash inflows over time as returns or revenues are generated.
Cash flow analysis involves assessing the movement of cash into and out of a business to understand its liquidity position, financial stability, and operational efficiency during a given period.
A cash flow example can be seen when a business receives ₹5,00,000 from customers and incurs ₹3,00,000 in expenses, resulting in a net cash flow of ₹2,00,000 for that period.
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