Cash flow describes how money moves in and out of a business over a given period. In other words, it is the company’s actual movement of liquidity—how much cash comes in from operations, investing and financing, and how much goes out in payments, expenses and repayments.
What does cash flow show?
Cash flow doesn’t just show whether a company has a profit on paper, but whether it actually has money available to pay bills, invest and pay salaries. That’s why it is a key metric when assessing a company’s liquidity and ability to survive in the short term.
Types of cash flow
- Operating cash flow - cash flow from the company’s core activities, e.g. selling goods and paying suppliers.
- Investing cash flow - cash flows related to buying or selling assets, machinery, property or financial investments.
- Financing cash flow – cash flows from taking out or repaying loans, dividend payments or owner contributions.
Why is cash flow important?
Even a profitable business can go bankrupt if it does not manage its cash flow. Positive cash flow means more money comes in than goes out, giving the business room to manoeuvre. Negative cash flow, on the other hand, can be a warning sign if it continues over a longer period.
Example
A company sells for DKK 500,000 on credit in January, but only receives payment in March. The profit and loss statement shows a profit, but in January there is no cash available to pay bills. Cash flow in January is therefore negative, even though there has been a sale.
Link to other KPIs
Cash flow is closely linked to KPIs such as return on assets, working capital and gross profit, but stands out by focusing on actual cash movements rather than accounting results.