Cash flow refers to the flow of cash into or out of a company during a specific period.

A cash flow therefore refers to the flow of liquid funds generated during the accounting period and generated by the ordinary activities of the company.

What does cash flow consist of?

Unlike profit, fictitious expenses such as depreciation and provisions (in other words, non-cash transactions) may not appear in cash flow.

Cash flow thus reflects a company’s actual earnings and financial strength by showing how much money a company has actually earned in a period.

Calculating Cash Flows

Cash flows are generally determined from ongoing business operations. Two methods have been established for their calculation:

direct method: cash flow is determined by the difference between payments and disbursements.
Indirect method: the cash flow then results from an adjustment to the net income for the year, with non-cash expenses and accrued liabilities taken into account.
The indirect method is often preferred to the direct method, since all the relevant data are already available in the income statement or balance sheet.

Cash flow: significance

Cash flow can be positive or negative, as can the company’s operating result (profit / loss).

  • Positive cash flow = surplus

If cash flow is positive, it means that revenues exceed expenses. A surplus is generated, which is called “cash flow”. The financial resources thus generated can then be used to make investments or repay operating debts.

  • Negative cash flow = deficit

If cash flow is negative, it means that the company’s expenses outweigh its revenues. We are then in a deficit situation.