Cash Flow: What It Is, How It Works, and How to Analyze It

What Is Cash Flow?

Cash flow is the movement of money into and out of a company over a certain period of time. If the company’s inflows of cash exceed its outflows, its net cash flow is positive. If outflows exceed inflows, it is negative.

Public companies must report their cash flows on their financial statements. This information can be of great interest to investors as an indicator of a company’s financial health, especially when combined with other data.

Formula and Calculation of Cash Flow

You can easily calculate a company’s net cash flow (NCF) using this formula:

NCF = TCI - TCO

Where:

• TCI = Total cash inflow
• TCO = Total cash outflow
  

Understanding Cash Flow

Cash flow refers to the money that goes in and out of a business. Businesses take in money from sales as revenues (inflow) and spend money on expenses (outflow). They may also receive income from interest, investments, royalties, and licensing agreements and sell products on credit rather than for immediate cash. Assessing cash flows is essential for evaluating a company’s liquidity, flexibility, and overall financial performance.

Positive cash flow indicates that a company’s liquid assets are increasing, enabling it to cover obligations, reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against future financial challenges. Companies with strong financial flexibility fare better, especially when the economy experiences a downturn, by avoiding the costs of financial distress.

Cash flows are reported on a cash flow statement, which is a standard financial statement that shows a company’s cash sources and use over a specified period. Corporate management, analysts, and investors use this statement to judge how well a company is able to pay its debts and manage its operating expenses. The cash flow statement is one of several financial statements issued by public companies, which also include a balance sheet and an income statement.

Cash Flow Statement

The cash flow statement acts as a corporate checkbook to reconcile a company’s balance sheet and income statement. The cash flow statement includes the bottom line, recorded as the net increase/decrease in cash and cash equivalents (CCE).

The bottom line reports the overall change in the company’s cash and cash equivalents over the last period.

Types of Cash Flow

Cash Flow From Operations (CFO)

Cash flow from operations (CFO) describes money flows involved directly with the production and sale of goods from ordinary operations. Also known as operating cash flow or OCF, as well as net cash from operating activities, CFO indicates whether or not a company has enough funds coming in to pay its bills or operating expenses.

It is calculated by taking cash received from sales and subtracting operating expenses that were paid in cash for the period.

Cash Flow From Investing (CFI)

Cash flow from investing (CFI) or investing cash flow reports how much cash has been generated or spent from various investment-related activities in a specific period. Investing activities include purchases of speculative assets, investments in securities, or sales of securities or assets.

Negative cash flow from investing activities might be due to significant amounts of cash being invested in the company, such as research and development (R&D), and is not always a warning sign.

Cash Flow From Financing (CFF)

Cash flow from financing (CFF) shows the net flows of cash used to fund the company and its capital. CFF is also commonly referred to as financing cash flow. Financing activities include transactions involving the issuance of debt or equity, and paying dividends.

Cash flow from financing activities provides investors with insight into a company’s financial strength and how well its capital structure is managed.

How to Analyze Cash Flows

Using the cash flow statement in conjunction with other financial statements can help analysts and investors make informed decisions and recommendations. Often-used measures include:

Example of Cash Flow

Below is the cash flow statement for Walmart (WMT) for the fiscal year ending on Jan. 31, 2025. All amounts are in millions of U.S. dollars.

Walmart’s investments in property, plant, and equipment (PP&E) and acquisitions of other businesses are accounted for in the cash flows from investing activities section. Proceeds from issuing long-term debt, debt repayments, and dividends paid out are accounted for in the cash flows from financing activities section.

Walmart’s cash flow was negative, showing a net decrease of $399 million, which indicates that it lost cash in the business and drained from its reserves to handle short-term liabilities and fluctuations in the future.

Explain It Like I'm 5

To better understand cash flow, think of your personal bank account. When you get money, you deposit it into the account; that's a cash inflow. When you take money out to buy things you need, that's cash outflow. 

If you get more money to deposit into your account than you spend, that's like a positive cash flow. If you take out more money than what you're depositing and your account balance drops, that's like a negative cash flow. 

In business, cash flow tracks the movement of money in and out. A negative cash flow isn’t always bad; it can indicate that you’re spending now to grow, upgrade, or invest. However, if negative cash flow occurs frequently or persists for an extended period, it may signal a bigger problem. 

The Bottom Line

Cash flow refers to money that goes in and out of a business. Companies with a positive cash flow have more money coming in than they are spending. However, cash flow alone can sometimes provide a deceptive picture of a company’s financial health, so it is often used in conjunction with other data.