Cash flow is the movement of incoming or outgoing payments that a business receives over a certain period of time. Thus, cash flow corresponds to the flow of cash generated during the financial year and by the common activities of the company.


Understanding cash flow :

  • Cash flow is the movement of payments in and out of a business.
  • Money received stands for inflows, while money spent stands for outflows.
  • The cash flow statement is a financial statement that reports the sources and use of a company’s cash flow over a period of time.
  • A business’s cash flow is mostly classified as operating cash flow, cash flow from investing, and cash flow from financing.
  • There are several methods to analyze a company’s cash flow statement such as debt service coverage ratio, free cash flow, and unlevered free cash flow.


What is cash flow used for ?

Fictitious expenses such as depreciation and provisions may not appear in the cash flow while profit can be found there.

Therefore, cash flow reflects the actual benefits of a business’s financial strength, showing how much the business has actually earned over a period.


What are cash flow measures ?

Cash flow serves multiple purposes. Indeed, it is one of the most important concepts in the finance and accounting field.

The most widely used cash flow measures are:

  • Net Present Value
  • Internal Rate of Return
  • Liquidity
  • Cash Flow Productivity
  • Payments of Dividends
  • Cash Conversion Ratio
  • Investment expenses.
  • Cash Flow Per Share (CFPS)
  • Price-to-cash flow (P/CF) ratio
  • Funding gap


How to calculate cash flow ?

Most of the time, cash flow is determined through common business activities.  There are two ways of proceeding. We find :

  • The direct method: cash flow found by the difference between payments and disbursements.
  • The indirect method: when the cash flow is the result of an adjustment of non-cash expenses, net profit for the year and accrued expenses being taken into account.

In most cases, the indirect method is used rather the direct method, because all important data is found in the income statement or balance sheet.

A positive cash flow indicates that a company’s liquid assets are increasing, allowing it to cover its obligations, reinvest in its business, return money to shareholders, pay expenses, and provide protection against future financial challenges. Companies with strong financial flexibility can benefit from profitable investments.  Usually, they manage the situation better in times of delay because they avoid the costs of financial distress.

It is thanks to the cash flow statement that these can be analyzed.  In general, it is used to find out when a company can make money to pay off debts and manage operating expenses. Company management, analysts and investors can use it.  This statement should not be overlooked, because it is as important as the income statement or the balance sheet.


Different types of cash flow 

Cash Flow from Operating Activities (CFO)

Cash Flow from Operating Activities (CFO) or operating cash flow correspond to cash flows related to the production and sale of goods from traditional operations.  Thus, there must be more operating cash inflows than cash outflows if a business is to be financially secure over a period of time.

Cash Flow from Operating Activities is calculated by taking liquidities received from sales and subtracting the operating expenses that were paid in cash for the period.  Cash Flow from Operating Activities indicates whether a business can generate enough cash flow to maintain and grow its business.

Cash flow from investing (CFI)

Cash flow from investing activities or cash flow from investing indicates the amount of cash generated or spent from various investing related activities during a specific time period.

Negative cash flows from investing activities may be due to significant amounts invested in the long-term health of the business.

Cash flow from financing (CFF)

Cash flow from financing activities (CFF) or cash flow from financing indicates the net cash flow used to finance the company and its capital. Financing activities include transactions involving the issuance of debt, equity and the payment of dividends.


How is cash flow different from income ?  

Income refers to income earned from the sale of goods and services.  If one sells on credit or via subscription, the money may not yet be received from that business activity and is recorded as accounts receivable. However, it does not represent a fictitious cash flow for the company at this time.


Why is cash flow so important ?  

The main reason for small business failure is the lack of liquidity.

When a business starts up, there are a lot of expenses and less money coming in.  This is why they will have to rely on other sources of funding in order to get started and find a positive financial situation.

The first six months of a business are a crucial period when it comes to cash flow.  If liquidity is low the chances of success are slim and most of the time suppliers don’t extend credit to new businesses and your customers may want to pay in installments, giving you a “liquidity crisis” to deal with.

So, when you start up and estimate your cash flow requirements, you should include personal living expenses that need to be funded by the company.

Seasonal business:  Cash flow is particularly important for seasonal businesses, that is, those whose activity varies greatly throughout the year.  Cash flow management in this type of business is special, but it can be carefully carried out.


Tips for cash flow management   

To ensure that you have enough cash flow to run your business properly, you need to :

  • Regularly keep your accounts, because it is the best way to understand the inflows and outflows of your business.
  • Produce cash flow statements.
  • Analyze your cash flow to better understand how money flows in your business.
  • Determine if your cash flow needs to be increased.
  • Reduce expenses when possible to increase cash flow.
  • Speed up your accounts receivable, because the faster you will receive money, the more liquidity you will have.


How to calculate cash flow ?   

To calculate cash flow, you only need to visualize the movement of money in and out of your business, however, there is much more to calculating it. That is why every CEO should develop an understanding of cash flow and what it means to their company.  The 4 formulas below provide a better understanding of how money flows in and out of your business.


4 formulas to use :

  • Cash flow = Cash flow from operating activities + (-) Cash flow from investing activities + Cash flow from financing activities
  • Cash flow forecast = Initial cash flow + Forecast inflows – Forecast outflows
  • Cash flow from operating activities = Net income + Non-cash expenses – Increases in working capital
  • Discounted cash flows (DCF) = Sum of cash flows for the period ÷ (1 + Discount rate) ^ Period number


To measure the profitability of a business, cash flow is a major indicator that should not be overlooked.  When a company properly manages a lot of liquidity, it can invest and reward shareholders with a dividend.  This is why cash flow and its calculation are essential. There are other ways to analyze shares. The cash flow and profit calculation as well as the balance sheet make up the core of every fundamental analysis.




This is why we recommend that you refer to one of our chartered accountants at CF Henderson, who will be able to offer you tailored solutions. Our expertise allows us to rightly support you, and to help you create, develop and transform your structure with confidence. With CF Henderson you will find the answers to your questions for establishing your business in France.



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