What is cash flow in business, and how to read yours
What cash flow actually means, why a profitable company can still run out of money, and how to read yours to decide without waiting for the accountant.
Cash flow is, in one line, the money moving in and out of your company’s bank accounts over a period. Not what you invoice, not what the P&L shows you earned: what actually hits the bank. If you run a small or mid-sized business, cash flow is the number that tells you whether you make it to the end of the quarter, whether you can hire that extra person, and whether next year’s growth is paid for or waiting on someone to pay you.
First thing to clear up: cash flow is not the same as profit. Different periods, different question, different answer. Mixing them up is the fastest way to be caught out.
Cash flow and profit: how a profitable company runs out of money
Profit uses an accrual basis. The moment you issue an invoice, that is revenue, even if the customer pays in 90 days. The moment a supplier bill arrives, that is a cost, even if you pay it in 30. Which is why your profit and loss can look fine while your bank account is bleeding.
Look at the classic pattern that takes down healthy companies. A business that is growing well has more customers, more orders and a bigger margin every month. On paper, a great year. But it sells on 90-day terms and buys on 30. Each month of growth brings forward the purchases and the payroll while pushing the receipts another quarter down the line. Profit climbs, cash drops. Watch it long enough and you reach the month where payroll will not go through.
A useful piece of jargon here: working capital. It is the cushion you need to fund the gap between money coming in and money going out. The faster you grow, and the wider the gap between what you pay suppliers in and what customers pay you in, the more cash it takes to keep the wheel turning.
The three buckets of cash flow (without the accounting textbook)
The cash flow statement splits the money moving through the business into three buckets. You do not need to sign anything to understand them, but you do need them to spot where cash is leaking or showing up.
Operating. The day-to-day of the business: what you collect from customers minus what you pay to suppliers, payroll, rent, social security and VAT. This is the only bucket that must be clearly positive over the medium term. If the business does not produce cash from operations, everything else is a patch.
Investing. Cash out when you buy something that will last (machinery, a vehicle, a long-term software contract, premises) and cash in when you sell an asset. In a healthy small business it is usually negative during the years you invest and positive when you divest.
Financing. What flows in and out from banks and shareholders: new loans in, loan repayments out, capital contributions, dividends. If operations do not fund the business, financing covers the gap. That is borrowing to operate, and it is a red flag over the medium term.
Free cash flow is the cash operations generate after paying for the investment it takes to keep the business running: what is left to pay down debt, return to owners or stack as a cushion.
How to read your own cash flow and decide
Staring at a cash flow statement without knowing what to look for is staring at a cliff. There is an order that helps.
- Closing cash balance. The dumbest number and the most important one. Did it go up or down against the previous period? Is it above a floor you would consider safe for sleeping? That floor is usually one or two months of fixed costs, depending on how long your collection cycle runs.
- Operating cash flow. If it is negative for the period, ask why. Lower sales? Longer collection times? Inventory piled up? A heavy VAT quarter you paid out?
- Overdue receivables. Money that is owed and should already have come in. If this is growing, operating cash flow will keep falling even if you sell more.
- Committed payments for the next 30-60 days. Payroll, the VAT return, loan instalments, signed purchase orders. These are not in the past, but they decide whether you make it.
Warning signs that reach the accountant too late: a big stack of overdue invoices nobody is chasing, rapid growth without a new line of credit, walking into a VAT quarter with no cushion, recurring payments (software, insurance, memberships) that nobody has an inventory of.
Backward against forward: the accountant’s report and the live forecast
The backward cash flow is what your accountant or finance team will send you: a monthly or quarterly statement explaining what happened. Useful for understanding the year and presenting to a bank. But too late to decide with.
The forward forecast is what tells you whether you can hire the second engineer this autumn or whether you need to wait for a big contract to close. It starts from the cash you have today, adds the receipts with their likely dates (invoices and confirmed sales orders), subtracts the payments you already know about (supplier bills, payroll, VAT, loan instalments, rent, recurring subscriptions), and projects your balance week by week for the next 13 weeks and month by month out to 12.
If you run on Odoo, the raw data is there. What is not in the box is the forward view in good shape; different routes exist, each with its price, its upside and its traps, and the right one depends on how many companies you run and how much you want to touch accounting. It also helps to know whether your Odoo is Community or Enterprise: the gap matters for what you can save. Kashbi builds that forecast from your Odoo data and emails you when projected cash falls below the floor you set.
A worked example: the company that grows well and runs out of cash
Picture Northwell Supplies Ltd, a Dublin wholesaler to industrial clients. It sells on 90-day terms, pays suppliers on 30, payroll and fixed costs are paid the same month. It starts with €30,000 in the bank. It had been invoicing €60,000 a month and goes into a run of 25-33% monthly growth after landing two new accounts. Variable costs (goods, subcontracting) 60% of revenue; fixed costs (payroll, rent, utilities) €20,000 a month.
| Month | Revenue | Purchases | Accrual profit | Receipts | Payments to suppliers | Fixed costs | Cash flow | Closing cash |
|---|---|---|---|---|---|---|---|---|
| 1 | €60,000 | €36,000 | +€4,000 | €60,000 | €36,000 | €20,000 | +€4,000 | €34,000 |
| 2 | €80,000 | €48,000 | +€12,000 | €60,000 | €36,000 | €20,000 | +€4,000 | €38,000 |
| 3 | €100,000 | €60,000 | +€20,000 | €60,000 | €48,000 | €20,000 | -€8,000 | €30,000 |
| 4 | €130,000 | €78,000 | +€32,000 | €60,000 | €60,000 | €20,000 | -€20,000 | €10,000 |
| 5 | €170,000 | €102,000 | +€48,000 | €80,000 | €78,000 | €20,000 | -€18,000 | -€8,000 |
After five months, Northwell has produced €116,000 of accrual profit and is overdrawn. Nothing strange happened: more sales, better margin, cash out before cash in. If you had seen this on a forecast in month 2, you would have negotiated an advance with the big customer, opened a factoring line, or stretched the supplier a little. Seeing it on the month 5 bank statement is seeing it late.
That is the concrete value of a forecast. If you want to build yours from scratch, the step-by-step guide to building a cash flow forecast gives you a script. For the metrics worth watching as a business owner, the piece on cash KPIs for business owners explains what to look at before the bank balance.
Frequently asked questions
Is cash flow the same as cash in the bank?
Not quite. The bank balance is a point in time. Cash flow is the movement over a period: how much came in, how much went out, and the net change. The useful information is what moved during the period and why.
How do you calculate cash flow?
Two methods. The direct lists real receipts and real payments by bucket. The indirect starts from net profit and adds back what does not move cash (depreciation, provisions), then adjusts for the things that do (changes in receivables, payables, inventory). For deciding week to week the direct view is more useful, and that is what any forecast builds.
Why look at cash flow if I already watch the bank balance?
The bank balance tells you where you are today. Cash flow tells you where the balance came from and, more usefully, where it will be in 4, 8 or 13 weeks if you do nothing. Deciding on hires or investments from today’s balance is driving while looking in the rear-view mirror.
Is negative cash flow always bad?
No. A year with negative operating cash flow because you invested heavily and built up stock to open a new market can be a very good decision. It becomes a problem when it repeats quarter after quarter and financing plugs the hole, or when it shows up without anyone deciding.