Accounting Concepts

Cash flow is the lifeblood of every business. It determines whether your company can sustain day-to-day operations, fund growth, and navigate challenges. 

In this article, we’ll break down the basics of cash flow, explain how to manage it effectively, and introduce you to tools that can help you streamline cash flow management. 

What is Cash Flow?

Cash flow refers to the net movement of cash in and out of a business over a specific period of time. 

Positive cash flow indicates that more money is coming in that going out, while a negative cash flow suggests the complete opposite. 

Public companies report their cash flows on their financial statements at regular intervals. This information is of great interest to investors, as it acts as an indicator of financial health. 

How to Calculate Cash Flow?

The basic formula to calculate cash flow is:

Net Cash Flow = Cash Inflows - Cash Outflows

By categorizing these into operating, investing, and financing activities, businesses gain a clearer picture of where their cash comes from and how it’s being used. 

Cash Flow vs Revenue

While revenue reflects the total income from sales, cash flow tracks the actual movement of money. This means a business can report high revenue, but still struggle with cash flow issues due to delayed payment or high expenses. 

Cash Flow vs Profit

Profit is the money a company has left after you subtract its expenses from its revenue. Cash flow, again, is simply the movement of money in and out of the company. 

A profitable company can face cash flow problems if payments are delayed. 

The Cash Flow Statement

A cash flow statement reports a company’s cash inflows and outflows, offering a clear picture of its ability to cover expenses and invest in growth. 

Unlike an income statement which focuses on profitability, the cash flow statement highlights whether the company is generating cash. 

This statement shows changes in cash over time, rather than absolute amounts, by reordering and using data from the balance sheet and income statement. 

It typically consists of three main sections:

1. Operating Activities: Cash flows from daily business operations
2. Investing Activities: Cash flows related to purchasing or selling long-term assets. 
3. Financing Activities: Cash flows from raising or repaying funds, such as loans or equity. 

The bottom line of the cash flow statement reveals the net increase or decrease in cash for the reporting period, making it an essential tool for understanding a company’s liquidity and financial health. 

How to Prepare a Cash Flow Statement

Preparing a cash flow statement involves organizing and analyzing a company’s cash inflows and outflows during a specific reporting period. 

Here’s a step-by-step to walk you through the process:

1. Determine the Starting Balance

Begin with the opening cash balance from the start of the reporting period. 

• This figure is typically available on the balance sheet under “cash and cash equivalents”.
• It represents the cash the company had at its disposal at the beginning of the period and acts as the baseline for calculating net cash flow. 

2. Calculate Cash Flow from Operating Activities

This section reflects cash flows directly related to the company’s core business operations. You can calculate it using one of the two methods:

Direct Method

• Record all cash receipts from customers and other operating sources.
• Deduce cash payments for expenses, such as supplier payments, salaries, and operating costs. 

This method provides a detailed view of cash transactions but can be time-intensive as it requires tracking every cash-related transaction. 

Indirect Method

• Start with the net income from the income statement. 
• Adjust for non-cash items, such as depreciation, amortization, and changes in working capital (e.g., accounts receivable, accounts payable, and inventory).

The indirect method is faster and more widely used, as it connects directly to the income statement and balance sheet. 

3. Calculate Cash Flow from Investing Activities

Here, you track cash flows related to the company’s long-term investments:

• Include cash spent on acquiring assets like property, equipment, or investments.
• Account for cash received from the sale of such assets.

This section provides insight into how the company uses cash to grow and invest in its future. 

4. Calculate Cash Flow from Financing Activities

Here, you focus on cash flows from raising or repaying funds. 

• Inflows: Cash received from issuing shares, raising loans, or obtaining other forms of financing. 
• Outflows: Cash used for repaying debts, buying back shares, or paying dividends to shareholders. 

This section highlights how the company finances its operations and growth.

Note: The treatment of certain cash flows, like interest payments and dividends, may vary depending on whether the company uses Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).

5. Determine the Ending Balance

Add the cash flows from operating, investing, and financing activities to determine the net increase or decrease in cash for the reporting period. 

• Combine this net change with the opening cash balance to calculate the ending cash balance. 
• This figure, found at the bottom of the cash flow statement, reveals the company’s liquidity at the end of the reporting period and serves as a vital indicator of financial health. 

Source: Harvard Business School Online

Cash Flow Example: Apple’s Q4 2024 Results

To understand how a cash flow statement works in practice, let’s break down Apple’s Q4 2024 cash flow, and connect it to some of the key concepts we’ve learned so far. 

Source: Apple

1. Starting Balance

Apple began the reporting period with a starting cash balance of $30.7 billion. This figure is listed under “cash and cash equivalents” on the balance sheet and acts as the baseline for tracking cash flow changes. 

2. Cash Flow from Operating Activities

Operating activities represent the day-to-day processes that generate cash for the business. For Q4 2024:

• Net Income: Apple reported a net income of $93.7 billion, which forms the starting point when using the indirect method.
• Adjustments for Non-Cash Items: Items like depreciation and amortization added $11.4 billion, while share-based compensation contributed $11.7 billion. These are added back to net income because they don’t involve actual cash movement. 

Working Capital Changes

• An increase in accounts receivable (cash owed by customers) reduced cash flow by $3.8 billion. 
• An increase in accounts payable (money owed to suppliers) added $6 billion to cash flow, as the company deferred some payments. 

Total Operating Cash Flow

Apple generated $118.3 billion from its operations, reflecting its strong ability to generate cash from core business activities. This positive figure aligns with the importance of operating cash flow as a sign of business efficiency and financial health. 

3. Cash Flow from Investing Activities

Investing activities track the company’s use of cash for long-term growth:

• Apple spent $9.4 billion on purchasing property, plant, and equipment, a typical outflow in this category. 
• Simultaneously, it generated $62.3 billion from the sale and maturity of marketable securities, resulting in a net inflow. 

Total investing cash flow: Apple recorded a positive cash flow of $2.9 billion in this category.

4. Cash Flow from Financing Activities

Financing activities involve raising or returning funds to stakeholders:

Apple spent heavily on shareholder returns:

• $94.9 billion on stock repurchases
• $15.2 billion on dividends. 

It repaid $10 billion in term debt but issued $4 billion through commercial paper. 

Total financing cash flow: Apple’s financing activities resulted in an outflow of $122 billion, reflecting its focus on returning value to shareholders and reducing debt. 

5. Ending Balance

After summing cash flows from all three categories:

• Operating Cash Flow: +$118.3 billion
• Investing Cash Flow: +$2.9 billion
• Financing Cash Flow: -$122 billion

The net result was a slight cash decrease of $0.79 billion, leaving Apple with an ending cash balance of $29.9 billion. This final figure is vital for assessing liquidity and is reported at the bottom of the cash flow statement.

How to Manage and Analyze Cash Flow

Cash flow analysis is an essential part of understanding your business’s financial health. It ensures you can meet obligations, support growth, and avoid financial strain. 

Here are some practical methods you can implement to keep your cash flow in check, with insights on how automation tools like Fyle and Centime can help:

1. Do you Have Enough Cash on Hand?

Running out of cash is one of the leading causes of business failure. Maintaining liquidity allows you to handle daily operations, seasonal fluctuations, and unexpected expenses. 

Some things you can do

• Build a cash reserve that can cover three to six months of operating costs.
• Regularly forecast cash inflows and outflows to anticipate shortfalls and plan accordingly.
• Establish an emergency fund, like a line of credit, to manage unforeseen cash needs. 

2. Keep a Close Eye on Accounts Receivable 

Late payments from customers can create cash flow bottlenecks, even for profitable businesses. 

How to address it:

• Use tools like Centime to automate collections, send reminders, and track overdue invoices. 
• Offer incentives for early payments and implement penalties for late payments. 
• Review your credit policies to minimize risks when extending payment terms. 

3. Manage Debt Payments Strategically

Poor debt management can erode cash reserves and damage credibility.

Some Best Practices:

• Prioritize repaying high-interest debts to reduce overall costs.
• Create payment schedules to avoid late fees or penalties.
• Align debt repayment plans with predictable cash inflows to maintain liquidity.

4. Use a Cash Management Software

Modern tools like Centime provide real-time insights into your cash flow trends, helping you make proactive decisions.

Key Benefits of Centime:

• Accurate forecasting using historical data to predict future cash flows.
• Scenario planning to evaluate the impact of changes, such as delayed receivables or increased sales.
• Improved decision-making by offering actionable insights for resource allocation and growth opportunities.

5. Track Business Expenses Effectively

Untracked or unmanaged expenses can lead to cash leaks and overspending.

How Fyle Can Help

• Real-Time Feeds: Connect your business credit cards directly to Fyle for instant visibility into spending. 
• Instant Receipt Collection: Employees can submit receipts via SMS, email, or other tools, reducing delays and improving record accuracy.
• Automated Reconciliation: Fyle automatically matches card transactions with receipts in seconds, minimizing manual errors and ensuring accurate cash flow records.
• Real-Time Visibility: Fyle’s spend overview dashboard gives real-time insights into company-wide credit card expenses, ensuring you’re equipped to identify potential risks and areas of overspending. 

What Fyle Can Centime Can do For You

Fyle and Centime offer powerful tools that streamline cash flow management by automating key processes, providing real-time insights, and enabling better decision-making. Here’s how they add value:

1. Real-Time Spend Visibility

• Fyle’s Advantage: Fyle gives finance teams a real-time overview of all business expenses, including credit card transactions. This level of visibility ensures there are no surprises and helps detect irregular spending patterns early.
• Impact: By having up-to-date expense data, businesses can adjust their cash flow plans proactively.

2. Automated Reconciliation

• Simplified Processes: Fyle’s real-time credit card feeds automatically match transactions with receipts, cutting down reconciliation time from days to minutes.
• Efficiency Gains: This not only saves hours of manual work but also ensures that cash flow records are accurate and up-to-date.

3. Expense Policy Compliance

• How It Works: Fyle checks for policy compliance as expenses are created. For instance, it flags overspending or duplicate expenses in real time.
• Cash Flow Benefits: Enforcing compliance prevents unnecessary cash outflows and ensures that spending aligns with company policies, safeguarding liquidity.

4. Forecasting and Liquidity Management

• Centime’s Role: Centime provides detailed cash flow forecasting, allowing businesses to predict future cash positions with precision.
• Why It Matters: Accurate forecasts help businesses plan for upcoming expenses, prepare for potential cash shortages, and make strategic investments confidently.

5. Holistic Integration

• Seamless Collaboration: The integration between Fyle and Centime allows for unified financial management, combining expense tracking with cash flow forecasting.
• Outcome: This holistic approach ensures that all financial data is accessible and actionable, making cash flow management smoother and more reliable.