What Is Cash Flow?
The three types of cash flow, and why profit is not the same as cash.
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| Operating | Cash from day-to-day trading |
|---|---|
| Investing | Buying and selling long-term assets |
| Financing | Loans, repayments, owner funding and dividends |
Cash flow in plain English
A business can show a profit and still run out of cash, for example if customers are slow to pay. Cash flow tracks the actual money moving in and out, which is why lenders and managers watch it closely.
Worked example
| Activity | Cash flow |
|---|---|
| Operating: cash from customers less cash paid for costs | +30,000 |
| Investing: bought equipment | −12,000 |
| Financing: new bank loan | +5,000 |
| Net increase in cash | +23,000 |
If cash at the start was 10,000, cash at the end is 10,000 + 23,000 = 33,000.
- Assuming profit equals cash flow.
- Putting a loan receipt in operating activities. Borrowing is a financing activity.
Frequently asked questions
What is the difference between profit and cash flow?
Profit follows accrual accounting and includes credit sales and non-cash items. Cash flow tracks actual cash received and paid.
What is the statement of cash flows?
A financial statement showing cash movements split into operating, investing and financing activities.
What does positive cash flow mean?
More cash came into the business than went out during the period.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.