What is Cash Flow and How do You Calculate it?

Cash flow

In the financial accounting of a company, cash flow is one of the most important indicators , since it provides information on income and expenses, allowing to determine the solvency and liquidity of the business. This work in the company is carried out by the Financial Controller , and its importance lies in the control of the cash flow status, since thanks to it, the ability of a business to generate wealth and help make decisions can be evaluated. strategies on the operation of the activity, its financing model and investments.

What is cash flow?

Cash flow refers to information about the resources that a company generates, both inflows and outflows, in a specific period of time. It is used to indicate the net accumulation of liquid assets during a specific period.

Types of cash flow

  • Operating cash flow.Amount of cash that enters and leaves the company through operations directly related to the exercise of its activity, without taking into account financing costs.
  • Investment cash flow.Amount of money entered or spent according to the company’s investments, generally in financial products that can be easily converted into liquidity, as well as in the purchase of real estate and tangible and intangible fixed assets.
  • Financial cash flow.Cash movements of the financial investments of the company related to its activity, such as the payment of credits or the cash received from the issuance of shares.

How to calculate cash flow?

Net cash flow refers to the cash flowing in and out of the business . It is calculated by adding the net profit to the amortizations made in the period, through the following basic formula:

Cash flow = Net profits + Amortizations + Provisions + Accounts payable – Accounts receivable

If the cash flow statement is positive, it indicates that the company’s income has been greater than expenses, but if it is negative it means that it has spent more than it has entered.

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