If you’re thinking about starting a business or have just taken the plunge and founded one, you’re probably busy with your business plan or getting operations and logistics set up just the way you want. However, successful business people understand that a lot of time needs to be spent with your books as well—specifically, looking at your statement of cash flow, or if you’ve not yet taken the leap, thinking about how you’re going to generate and optimize cash flow.
In this guide, we’re going to explain what cash flow is and why it’s so crucial for the sustenance and survival of a business. We'll also look at how to analyze and interpret your cash flow, with a couple of household names as examples.
What Is Cash Flow?
To put it quite simply, cash flow represents the state of your company’s bank account—it’s the amount of money you’re making versus how much you’re spending. You can also define it as the net amount of cash and cash equivalents being transferred in and out of a company.
Why Does Cash Flow Matter?
Since cash flow looks at both the money that’s coming into and out of a business, it’s an excellent indicator of a company’s financial situation. When money comes in as part of your revenue, you’re giving yourself the ability to pay your expenses such as bills and salaries—the distinction here is that you’re able to pay with money that you have right now, versus having your financial situation tied to big accounts receivable.
If you’ve ever worked a day job, think about payday. Would you prefer to get paid every week, every month, or every six months? Well, many expenses are deducted monthly, some even more frequently than that—groceries are a weekly thing, for example. So, getting cash into your bank account more frequently allows you to take care of expenses as and when they come up, making budgeting far easier.
Positive cash flow means that your company’s liquid assets are moving in the right direction, and this in turn tells you and your investors that your company can take care of all of its expenses while also growing its buffer against any unexpected costs that may come up. It also means that the likelihood of giving some of that cash to investors via dividends is also growing.
Maintaining cash flow also means that your business is self-sustaining, and even major obstacles such as a legal challenge from a customer refusing to pay their bills shouldn’t send you into the dreaded realm of bankruptcy.
What’s the Difference Between Cash Flow and Revenue?
Revenue makes up a part of cash flow, and you can’t have cash flow without any revenue. However, cash flow also takes into account the amount and rate at which you’re paying out money—all of your expenses need to be paid, and simply looking at revenue doesn’t give you any sort of idea whether or not your company is in good financial health since it could be nullified by outflows.
Three Types of Cash Flow
When looking at the cash flow of your business and trying to analyze its financial health, it’s useful to break it down into three distinct types of cash flow. They are:
1. Cash flow from investing
Often abbreviated as CFI, cash flow from investing refers to the amount of cash that your company can generate across a given period from purchases and sales of assets or securities. It’s not a bad thing to have a negative CFI; most of the time, that means you’ve spent money on an investment you hope will pay off later on down the line.
2. Cash flow from operations
Cash flow from operations (CFO), or operating cash flow, is the amount of money coming in and out due to ordinary operations of the company. This is where you calculate how much money you’re bringing in from sales and how much you spend on operating expenses. It’s one of the best indicators of financial health, since if you’re relying on other sorts of cash flow (such as CFI) to balance out your operating cash flow, it might be a sign that your basic operating model is flawed or needs external financing in order to get to where it needs to be.
3. Cash flow from financing
Cash flows from financing (CFF), or financing cash flow, tells the story of how money moves in and out of your company as a result of the issuance of debt and equity or the payment of dividends. Raising money via a share offering or selling bonds is one way to gain positive cash flow from financing, while issuing dividends sends it into the negative—and again, that’s not a negative cash flow entry that’ll worry investors at all.
Understanding a Cash Flow Statement
Now that you’ve got an understanding of the different ways cash flow can be categorized and what they mean, we need to look at the various elements that go into a cash flow statement. Here are some terms you’ll see companies use in their cash flow statement and what they mean.
Free cash flow
This term refers to the net cash flow that your company has after deducting outflows such as dividends and debts, essentially allowing you to judge how much money there is left to put into the business. This number doesn’t have to be too high for a company to be attractive, especially if you’re paying lots of dividends, but more free cash flow means more likelihood that business operations improve in the future, earning even more revenue.
Unlevered free cash flow
This metric looks at the total free cash flow excluding interest payments, giving you a view of your company’s cash flow situation prior to fulfilling any financial obligations you might have in place.
Operating cash flow
As we’ve mentioned previously, operating cash flow is the big one—it’s the amount of money coming in and going out as a result of your core business operations. This is one of the key metrics you’re looking at on any set of financial statements.
Cash flow to net income ratio
The cash flow to net income ratio is the ratio of your cash flow to your net income, which includes non-cash items like depreciation and amortization. A good cash flow to net income ratio (1:1 or higher) means that your company is actually seeing cash inflows, rather than subsisting on aggressive accounting practices or delayed collections.
Current liability coverage ratio
This is another important ratio because it looks at your company’s ability to pay off its current liabilities using the cash flow from operations. This is an excellent at-a-glance indicator of financial health, or lack thereof if current liabilities far outweigh operating cash flow.
Price to money flow ratio
If a company is listed on an exchange, you can measure its price to money flow ratio by dividing the operating money flow per share by stock price. Money flow is different from cash flow, measuring the cash and cash equivalents generated by operations minus capital expenditures.
How to Calculate Your Business’s Cash Flow
To calculate the cash flow of your business, all you need to do is subtract the total cash outflow from the total cash inflow. What’s left is your total cash flow, although you can analyze this in further detail by looking at your cash flow statement.
Here’s a screengrab of Apple’s 10-Q, looking at the first nine months of their 2024 fiscal year. As you’ll see right off the bat, their cash flow statement has been organized using the three categories we mentioned earlier.
Apple’s cash flow from operations looks very healthy given that the company is reporting over $91 billion in cash generated by operating activities. It’s even trending upward compared to the operating cash flow situation 12 months prior.
The company is also sitting at close to $1.5 billion in cash flow from investing, although cash flow from financing drags the total cash flow down into negative territory. So, if you were a shareholder of Apple, would you be worried that the company is reporting a negative cash flow of over $4 billion?
Probably not. For one thing, the very next line after that negative total cash flow line reports that they have over $26 billion in cash lying around, meaning they’ve still got plenty on hand to deal with any unforeseen expenses.
Secondly, the lion’s share of the negative financing cash flow comes from repurchases of common stock. This is unquestionably good for existing shareholders, as is the second-largest negative line item in that category: dividend payments. Total cash flow may be negative, but Apple effectively used $80 billion across nine months to enrich shareholders—not a bad thing if you are one.
In contrast, let’s take a look at another well-known S&P 500 company. These are Tesla’s financials for the six months of their 2024 fiscal year, and the signs aren’t quite as good:
First of all, the company’s net income has just about halved from where it was the previous year. That’s not a great sign, and while cash flow from operations is positive, the $2.5 billion in depreciation, amortization, and impairment does stick out a little bit.
Cash flow from investing activities is negative, but as we’ve discussed, that’s not a bad thing—Tesla appears to have invested over $5 billion on property and equipment and has further made investments to a value of over $14 billion. These will naturally be a drag on cash flow, but one hopes that the company leadership has made bets that’ll pay off in the long run.
Finally, cash flow from financing is positive, but that’s largely due to proceeds from the issuance of debt—so they’ve raised cash by borrowing it. Good for cash flow, but it’s a liability that needs to be reckoned with.
All in all, that’s a negative cash flow of $1.8 billion with reserves of $17 billion on hand, so they’re not going to crash anytime soon. However, the fact that Tesla’s negative cash flow figure is so similar to Apple’s is illustrative of the fact that when dealing with cash flow, it’s always best to analyze the different categories in a little more detail before making any sort of judgment call or financial decision.
Here’s one last example, the last 10-Q filed by Twitter before it was purchased and taken private:
Perhaps surprisingly, the bottom line here is that Twitter actually had a positive cash flow to the tune of half a million dollars during the first six months of their 2022 fiscal year and even repurchased over $2 billion in stock during that time.
However, the company could only manage $155 million in operating cash flow, with the majority of inflows coming from the $1.05 billion sale of an asset group. That figure padded their investing cash flow up to around $1.4 billion, almost 10x the value of their actual operating cash flow.
Enhance Your Ecommerce Knowledge With Whop
Financial data can be quite tricky to get your head around, but mastering elements such as cash flow and learning to understand how to optimize it for your own ecommerce business can help you get a leg up on the competition.
Cash flow is also one of the most important practical elements of a business—just ask any small firm that deals with a monopolistic or system-relevant organization with lots of clout.
More often than not, the bigger firm will look to sign a contract that pays the small vendor upon delivery, meaning that the vendor’s balance sheet will look great but only because it’s being held up by a big account receivable in the assets column. In the months before getting paid, they need to subsist and pay the bills every week or month with the cash they have in the bank, or even borrow to do so.
Lots of small companies go bankrupt this way, and others die because the big fish refuses to pay, then drowns them by dragging out legal challenges that they, again, don’t have the cash flow to survive.
So, give your business the best chance of survival in the shark-infested waters of ecommerce by prioritizing cash flow. You can find out how to do so and learn about managing your ecommerce business more profitably by checking out Whop's ecommerce communities—there, you’ll find entire groups, workshops, and masterminds of other entrepreneurs, plus extensive courses to help you on your way.
FAQs
What’s the difference between cash flow and profit?
Profit looks at whether a company is actually making money by comparing revenue and expenses, whereas cash flow takes into account liquidity and whether your company has cash on hand to make those payments regularly and on time.
Does a company have to submit a cash flow statement?
Public listed companies have to report a cash flow statement along with other financial documentation and make it public every quarter. This is why we were able to look at recent financials of both Apple and Tesla above, but not Twitter, which is now private (though still subject to certain reporting requirements).
What is the price to cash flow ratio?
Price to cash flow is a metric that looks at a company’s stock price relative to operating cash flow per share. It can be a useful tool to analyze companies using their core business operations as a yardstick.
