What is cash flow?
Cash flow is the net movement of cash into and out of a business over a period. The statement of cash flows (IAS 7 / ASC 230) reconciles accrual net income to the change in cash on the balance sheet by walking through three activity buckets.
The three sections
- Operating activities: cash from running the business: collections from customers, payments to suppliers and employees, taxes paid. Most companies present this using the indirect method, starting from net income and adjusting for non-cash items and working-capital changes.
- Investing activities: capital expenditure (capex on fixed assets), acquisitions, purchase or sale of investments.
- Financing activities: equity raises, share buybacks, dividends, debt issuance and repayment.
Cash flow vs. profit
A company can be profitable and still run out of cash. The typical gap drivers:
- Growing receivables (DSO climbing): revenue booked, cash not collected.
- Inventory build for anticipated demand: cost paid, sale not yet made.
- Heavy capex: investing-section outflow that does not hit the P&L immediately.
- Working-capital swings around large customer payments.
Free cash flow (FCF)
The most-watched derived metric: FCF = Operating Cash Flow − Capex. Some investors deduct stock-based compensation for a stricter “FCF after SBC”: particularly relevant for SaaS, where SBC can be 15–25% of revenue.
Do: publish a monthly cash-flow forecast 13 weeks forward; reconcile weekly to actuals.
Don’t: celebrate operating cash flow without checking working-capital dynamics: a swing in customer payment timing can flatter or punish a single quarter.
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