Cash flow is the movement of money into and out of a business. It’s a crucial indicator of financial health, revealing how well your business can generate cash to pay debts, fund daily operations and invest in growth initiatives. Monitoring cash flow requires regularly reviewing your business’ cash flow statement, income statement and balance sheet. These can be used to calculate metrics and ratios that help assess liquidity over a single period or multiple periods. 

Cash flow statement basics 

Typically generated monthly, quarterly or annually, a cash flow statement allows you to see where your business has spent cash, the source of cash inflows and how much cash is on hand at the end of the period. 

It gives you a clear picture of your business’ liquidity and financial health, allowing you to see if sufficient cash is on hand to maintain operations. 

A cash flow statement provides a breakdown of cash activities for three key areas:  

1.Operating activities 

Operating cash flow covers transactions related to your business’ primary operations. It is calculated by taking cash from customers, dividends, or interest payments and subtracting operational expenses such as rent, salaries, or supplies.

2. Investing activities 

This is the amount of money spent on long-term assets such as property, plants, and equipment, as well as investments in securities.

3. Financing activities 

Financing cash flow encompasses cash raised or spent to fund the business. It covers such activities as borrowing and repaying debt, issuing and repurchasing stocks, and paying dividends.