What is cash flow? How to calculate cash flow correctly

Financial management is one of the factors that determine the success or failure of a business. In this area, the term cash flow plays a very important role. So what is cash flow? How to calculate cash flow? Please follow this article for details!

What is cash flow?

Definition of cash flow

Cash flow is a term in the financial industry, roughly translated as cash flow, which can be cash or cash equivalents. This term is used when analyzing financial statements, showing the movement of money (or receipts and expenditures) in a certain store, business, project or financial product.

After each accounting period, cash flow will be detailed and reported. By looking at this report, you can analyze and evaluate the existing problems in the company’s cash-related business. If the total revenue is greater than the total expenditure, the cash flow is positive, whereas if the total revenue is less than the total expenditure, the cash flow is negative.

Cash flow helps managers come up with more appropriate business plans or strategies for businesses.


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Classification of cash flow

Cash flow is divided into 3 main categories that any financial professional knows: Operating cash flow, investing cash flow and financial cash flow.

Operating cash flow

This is the most basic and most noticed cash flow. Operating cash flow is calculated based on actual results from the business’s operations.

Investment cash flow

This type of cash flow is calculated based on the investment or acquisition activity of the business. Through this cash flow, the business can analyze and make a decision whether to invest more or reduce investment for a certain item or not.

Financial cash flow

This type of cash flow will calculate based on borrowing or repayment activities, dividend payments, repurchase/new issuance of shares. Besides, this is also money from shareholders to contribute more capital, money mobilized through borrowing capital from other companies, banks or financial companies.

How to calculate cash flow

Calculating cash flow in the business for purposes such as:

  • Evaluate the business performance of a business or a project.
  • Assessing liquidity, a profitable business may not necessarily have good liquidity. Without cash, the business could completely go bankrupt.
  • Check the actual income or growth of a business.

The cash flow formula used on the statement of cash flows:

Cash flow from operating activities + Cash flow from investing activities + Cash flow from financing activities + Initial cash balance = Closing cash balance


  • Cash flow from operating activities = Total cash inflows from operating activities – Total cash outflows from operating activities.
  • Cash flow from investing activities = Total cash inflows from investing activities – total cash outflows from investing activities.
  • Cash flow from financing activities = Total cash inflows from financing activities – Total cash outflows from financing activities.


Steps to plan cash flow for business

Cash flow is considered a decisive factor for the success or failure of a business, so cash flow planning plays a very important role. Here are 5 steps to help you plan your cash flow effectively.

Make forecasts for cash inflows

Forecasting cash inflows will save businesses from having to check a lot after having actual data. A business’s cash inflows can come from three sources:

  • Business activities: come from revenue-generating activities such as sales, service provision, debt collection, etc.
  • Financial investment activities: money for issuing shares, money raised from borrowing capital, money from owners contributing capital in cash, etc.
  • Investment activities: proceeds from investments, interest, loans, liquidation/sale/transfer of fixed assets, etc.

Make forecasts for cash outflow

Forecasting cash outflows helps businesses have a good budget preparation for spending. The firm’s cash outflow includes:

  • Expenses for business activities: interest payments on capital loans, payments to the state budget, advertising and marketing expenses, service fees, materials investment, salaries, input expenditures… Generally, the main revenue-generating activities of the business.
  • Spending on investment activities: loans, capital contribution, purchase of fixed assets and equipment, construction of infrastructure, etc.
  • Spending on financial activities: money to buy issued shares, pay investors, loans/financial leases, etc.

Calculate the net cash flow of the business

Based on the above formula, you can calculate the net cash flow of the business. Based on this amount, you will know whether the cash flow is positive or negative and then make the appropriate changes.

Determine the amount of excess or deficiency at the end of each period

The amount of excess or lack of money at the end of the period will help you know whether the business is going up or down.

Provide treatment solutions

Based on the excess or lack of money at the end of the period, you can offer solutions to handle:

  • If there is excess: You can decide whether to invest in other projects to continue to be profitable
  • If lacking: You must have a plan to improve cash flow and business operations.

See also: What is the accounts receivable turnover? Calculation and specific meaning

Some ways to help businesses improve cash flow

Reduce purchase costs

By reducing purchasing costs, you will save cash outflow, thereby improving net cash flow. To reduce this cost, you should compare and choose suppliers with lower input material costs.

Increase sale revenue

There are many ways to increase sales, in which the way to reduce product prices is often applied by many businesses.

One thing to note is that you should only discount popular items, not all. The 25% reduction is considered reasonable.

Use multiple payment methods

This means that you will pay your suppliers in a form other than cash but still keep the commercial terms previously agreed upon with them. Increasing your supplier’s cash retention will make it stay with your business longer. However, this money needs to be put into the business to be profitable.

Inventory control

This will help you realize if the business is having problems in business or not. If the warehouse holds too many goods, it means that the working capital is frozen, the old goods do not go, the new goods will not have a place to store. Let’s build a backup warehouse system, promote the consumption of slow-selling items, and replace them with better-selling items.

Strengthening the collection of company debts

First, you need to check how much of the borrower’s debt the company needs to collect. Then, collect debt quickly, receive deposits, set up a payment process to collect payment on delivery. This will help increase capital and stabilize cash flow.

In short, if you can manage cash flow well, your business will grow steadily. The above article has provided the basic information about cash flow, hopefully you will know more about an extremely important term in finance.

FAQs about cash flow

What is the difference between revenue and cash flow?

Revenue refers to the income earned from the sale of goods and services. If an item is sold on credit or some other form and the money is recorded as accounts receivable. However, these do not reflect actual cash flows into the company at that time.

What is a cash flow statement?

The statement of cash flows is a summary of the company’s cash payments and receipts for a certain period of time. The cash flow statement also shows the changes of assets, the ability to convert to cash as well as the ability to pay, etc.

Can the company not report cash flows?

The cash flow statement is in addition to the balance sheet and income statement. This is a required part of the financial statements of a regulated company since 1987.

What is free cash flow?

Free cash flow is the money left over after the business has paid its expenses. Simply put, this is the expected cash flow before undertaking a new project. This is an important indicator for investors to gauge whether a company is doing well or not.

The free cash flow is calculated as follows:

Net income + depreciation – change in working capital – capital expenditure = free cash flow

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