Cash flow is the amount of money flowing into and out of a company’s account. These flows are analyzed in accounting and finance to determine whether or not a company needs cash. The free cash flow is a concept that allows to determine the investment policy in a company. We detail all this in this article!

If you are a company manager (or future manager), don’t panic, we will decipher the key elements concerning cash flow. It is important that you know how to interpret the movements of money in your bank account in order to prevent a lack of liquidity that could be very annoying (your accounts must necessarily be positive).

What is cash flow?

Cash flow is the amount of money that flows through your company’s accounts. To put it simply, let’s take a company that has a single bank account through which all money flows directly. So you will have two types of cash flow:

  • incoming cash flows (money coming in, customer payments)
  • Outgoing cash flow (expenses related to your business)

It is the interpretation of the flows that we will make of them that will be the subject of analysis.

Two main constraints apply to all companies:

  • accounts must always be positive (if money goes out faster than it comes in: trade receivables, late collections, etc., then you have a problem).
  • the investments must be financed by the company’s available funds

Between the beginning and the end of a month, for example, here is how your company’s availabilities break down:

Final cash position = Incoming cash flow(1) – Outgoing cash flow(2) + Initial cash position(3)

At each period either you increase your initial cash flow or you consume your cash!

Calculation and analysis of cash flow

Blocks (1) and (2) over a given period (a month for example or a quarter depending on the cycles of your activity) determine whether in each period :

your cash flow grows or runs out: this is the cash flow.

If inflows – outflows > 0 :

Your business generates cash flow (no more money coming in than going out), this is an indicator of the financial health of your business.

If the inflows – outflows < 0 :

In this case your business consumes more liquid resources than it generates, you are in negative cash flow. At each period, your cash flow becomes poorer. This situation can be intentional: this is the case for investment periods that initially involve consuming more cash in order to generate income in a second phase.

Why have a positive cash flow?

Having a positive cash flow indicates that the company is creating wealth in the form of cash, which is very reassuring for a bank or investors. Indeed, these liquidities can be transformed into dividends and remunerate shareholders! Banks will be reassured by the fact that your business will be able to repay a loan because it is generating surpluses every month. Once again, it is not necessarily necessary to have a business that quickly generates cash flow, but in the long term you must aim to generate this income.

If your cash flow is negative, you must have the necessary cash flow to support it. You must also plan investments: capital contributions or medium or long-term debts to enable you to finance this phase, which will lead you to a surplus of liquid assets in the future.

Another way of interpreting this result is to note that a postive cash flow implies a negative working capital requirement, which is another indicator of your company’s good health.

Keep in mind to recover your receivables

If your treasury is not sufficient to cover your expenses, chances are that it is due to a non-recovery of debts.