Cash flow can be categorised as:
Cash Inflows
Cash Inflow is money coming into a business through any source of income generated by the company.
The most common Cash Inflow entries on the balance sheet are:
- Income from the sale of goods or services
- Returns on investment in trade finance assets, stocks, property, or equipment
- Capital from funding and financing activities
Cash Outflows
Cash Outflow is money leaving the business due to any form of expenses, debts, or liabilities.
The most common Cash Outflow items found on the balance sheet include:
- Salaries payments to employees and management
- Procurement of goods or equipment, e.g. a computer company paying $150 million for outsourced microprocessors
- Loans provided to other businesses
- Dividend payments to shareholders
Net Cash Flow
Net cash flow is the difference between cash inflow and outflow, either positive or negative.
Positive vs Negative Cash Flow
A company’s cash flow can be positive or negative depending on it cash outflows and inflows.
It is important for businesses to understand the impact of positive and negative cash flows to determine and analyse cash flow forecasts thoroughly.
Positive Cash Flow
A company has a positive cash flow if the cash inflow is greater than its cash outflow. Thus, the business has enough liquidity (cash) to pay the expenses.
For example, a business starts with $50,000 in cash.
It incurs $63,000 in expenses, but $117,000 of cash inflow enters the business (from various sources).
The net cash flow is positive at (50,000 + 117,000) – 63,000 = $104,000
Refer to the illustration below for a better understanding of the flow.
Negative Cash Flow
In contrast, negative cash flow is when cash outflow exceeds cash inflow.
Negative cash flow stalls the business from paying for current and future expenses.
For example, a business starts with $50,000
Cash inflow is $95,000 but cash outflow is $158,000.
The balance of -$13,000 is calculated as [(50,000 + 95,000) – (158,000).
Thus, the company’s net cash flow is negative.
Check the illustration below for a calculation breakdown.
Yet, not all negative cash flows are bad.
For example, when investing in fixed or non-current assets, the company does not receive proceeds immediately.
Cash outflow today can help companies gain a greater cash inflow in the future, making the negative cash balance a sign of future revenue.
