Cash flow. A word you often hear in finance. But what exactly does it mean? And why is it important? In this blog, we take you through the key terms.
Cash flow is all about money. It shows how much cash is coming in and going out. Think of payments from customers and bills you have to pay yourself. Positive flow means more is coming in than going out. Negative cash flow is the opposite. Simple, right?
The overview
A statement charts this clearly. It is a financial report. It shows all cash flows within a given period. The statement often breaks down into three parts:
- Operational activities – Money from your day-to-day operations.
- Investments – Purchase or sale of major assets.
- Financing – Loans, dividend payments or share issues.
So you can see exactly where your money comes from and where it goes.
Free cash flow (incl. formula)
We are talking about cash profits in this blog. This is what remains after all expenses and investments. You can spend this money freely. For example, to invest, pay off debts or distribute profits. Therefore, free cash flow is an important measure of the health of your business. The formula is simple:
Free cash flow = operating cash flow – capital expenditure (CapEx)
Suppose a company generates €500,000 in operating cash flow in a year. At the same time, it invests €150,000 in new machinery and other capital expenditure. The result is: €500,000 – €150,000 = €350,000
This amount is available to repay debt, pay dividends or reinvest. It gives a clear picture of the financial leeway a company has.
Operating cash flow
This is the heart of your business. It shows how much cash you generate from your core activities. For example, by selling products or providing services. Without a strong cash position, you will be in trouble. It is the fuel for growth and stability.
Why is it important?
Cash flow determines whether you can pay the bills. Whether you can invest in growth. Whether you can survive at all. Profit on paper is nice, but without cash you won’t make it.
Tip: Keep a close eye on your cash flows. Regularly analyse statements. This will help you avoid surprises and stay financially sound.
What about your business? Do you have a clear overview? If not, time to take action!
