Cash Flow Definition: What is it? Importance, Types and Example

Cash flow is an extremely important measure when it comes to assessing the financial health of your business. 60% of businesses have reported experiencing cash flow issues and 89% of business owners have seen a negative impact on their business because of cash flow problems.¹

Having a clear understanding of what cash flow is, why it’s important, and the different types of cash flow can be incredibly helpful in understanding and improving business performance.

This article will take you through a definition of what cash flow is and what types of cash flow businesses should be looking at.

What is cash flow, and why is it important

The basic definition of cash flow refers to the amount of money that is coming in and out of the business. ²

Cash flow is crucial for a business for many different reasons.

• Businesses are required to report a cash flow statement as part of their financial documents.³

• It’s a crucial metric, used when reviewing and monitoring a business’ financial performance and determining the next steps in growth.

• Particularly for international businesses, it can be a useful metric to help rethink costs, understand multi-currency effects of supplier payments, make investments or obtain a loan.

Having a clear understanding of how cash is being received and spent, and to understand overall cash flow management is vital to mitigate any cash flow problems before they arise and damage the business.

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Cash inflow

Cash inflow refers to the money a business receives.⁴ Essentially, it’s the income that is generated through the business and its daily activities.

Cash inflow is incredibly important because it is how revenue and profit is generated. A positive inflow of cash, helps a business grow while also maintaining its expenses.

Sources of cash inflow can include:

• revenue generated from selling goods or services domestically or internationally - such as US-based companies selling goods or services in the US and Europe

• dividends or returns received from investments

• any financial activity a business partakes in, that generates revenue and interest received from domestic and foreign businesses

As businesses generate cash, they can develop additional strategies by partnering or acquiring other companies to increase cash inflow further.

Cash outflow

Cash outflow refers to the spent money, that moves out of the business to help it run and operate.⁴

Cash outflow may include:

• office rent across different locations and countries

• any liabilities the business holds

• debt repayments

• supplier payments and payroll expenses in multiple countries

Multi-currency payments, in particular, can get difficult to manage when monitoring cash outflow, if different methods are being used.

Usually payments and transfers result in costly conversion rates - one of the many cash flow problems faced by international businesses.

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Positive and Negative cash flow

When businesses have a positive cash flow, it means they have increased their liquid assets.⁵

Positive cash flow occurs when a business is left with cash even after paying all cash outflow expenses such as operations and debt.

It means that the business is profitable and that companies have the ability to grow and reinvest as needed with positive cash.

Negative cash flow, however, is a little more complicated.
Although the name might suggest otherwise, it’s not always a bad thing - depending on what is causing the negative cash flow.

For example, if operations and other costs lead to more outflow than cash coming in, that means the business is not profitable, leading to dire consequences down the line, such as bankruptcy.

However, if the negative cash flow is occurring because the business is investing in different areas to bolster the long-term health of the business, then negative cash flow may not be a sign of trouble.

Types of cash flow

There are three types of cash flow used to measure the business’s financial health across various aspects.

Cash flow example

Many examples of cash flow statements are available from large and small companies to better understand how they measure cash inflow and outflow.

Here is an example of a cash flow statement.

As you can see, using the Wise cash flow template, the cash flow statement includes the different types of cash flow across different parts of the business to understand its financial performance.

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Wise enables businesses to gain more control over their spending and monitor cash flow more thoroughly. Wise multi-currency accounts allow you to manage all your currencies and subscriptions in one place.

With Wise, you can use one account for more than 40 currencies to connect with customers and suppliers overseas. Pay employees and merchants around the world with one click, easily.

On top of that, Wise makes payments fast and provides upfront, transparent fees. You’ll always get the mid-market rate while saving up to 19x compared to PayPal.

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All sources checked 29 September 2021