Along with balance and income, a cash flow statement is one of the three main elements of business financial analysis. The term cash flow refers to the amount of money being transferred in and out of a company in a given time period (Murphy, 2022). It plays an important role in assessing a company’s financial viability because it indicates whether it is generating cash and managing it well enough to pay its debt obligations and fund operating expenses (Murphy, 2022). Negative cash flow shows that a company is spending more cash than it is making. Positive cash flow signifies that a company’s liquid assets have increased, and it can use the money to reinvest in its business, reimburse shareholders, or pay expenses. While negative cash flow is common in the first few months or years of business, eventually, a company has to generate positive cash flow to be financially viable in the long term.
A business receives money from multiple sources, so there are four types of cash flows. Firstly, cash flow from operations (CFO) applies to the money made directly from producing and selling goods or services. It is calculated by subtracting operating expenses from the cash received from sales. Secondly, cash flow from investing (CFI) describes the cash produced from investment-related activities, such as purchases of speculative assets or investments in securities (Hayes, 2021). Thirdly, cash flow from financing (CFF) refers to the cash used to fund the company and offers an insight into its capital management and structure (Hayes, 2021). Additionally, while this metric is not included in the cash flow statement, a company might calculate its free cash flow, the amount of cash available after all operating expenses are paid. CFO, CFI, CFF are the three main types of cash flow, but free cash flow could also be calculated to measure a company’s liquidity.
Hayes, A. (2021). Cash flow. Investopedia.
Murphy, C. (2022). Understanding the cash flow statement. Investopedia.