Financial analysis is one of the main problems that any company encounters today. Therefore, it is important to know what it is and how to build a cash flow to have a good financial control. The translation of this concept itself defines what it consists of. cash flow in a company,i.e. cash in and cash out.
But what is cash flow and how is it calculated? There are many companies that forget to control this fundamental aspect. Cash flow shows us if there is a problem with the company’s liquidity or if the project is viable in the short term. Therefore, if the cash flow is negative, it is telling us that the company cannot meet its payments and will have to be financed in some way through debt or capital increases.

What is cash flow and how is it calculated?

It is simple: it is the sum of the income (inflows), not to be confused with the turnover, in the cashf low is what has already been collected and to this result, all the expenses (outflows) are subtracted, just as in the income here are the expenses that we have already paid. Within this calculation we can lose sight of certain details that can give us a lot of information, so we break it down into 3 to see the cash variation associated with each one.

Types of cash flow

In this way, we understand which of the company’s revenues and which of its expenses are derived from operations, investments or financing.

  1. Cash flow from operations or operating cash flow (CFO): also known as an indicator of the income or expenses generated by a company’s main activity, i.e. it measures whether it is being profitable or not.
  2. Cash flow from investment (CFI): this element is composed of all disbursements made by the company in terms of investments, both tangible, such as the purchase of machinery, and intangible assets, such as the expenditure on the development of the company’s web platform.
  3. Cash flow from financing (CFF): also known as the expenses and revenues related to the financing of the company. This financing can come mainly from two different sources. Capital increases, either by Business Angels or Venture Capitals in exchange for shares in the company. Or financing through some type of bank, public and other types of debt that will have to be repaid in the future.

Therefore, and very briefly, cash flow as an essential tool to make decisions.
to make decisions
and to have a good financial health. In addition, it will help you to have a broader and clearer picture of how our income and expenses are working, as well as the cash cycle that the company is having, to make decisions related to negotiating longer payments or earlier collections.

In short, this financial indicator is key to know the financial health of our company, beyond the apparent results. It is an essential tool to anticipate liquidity problems.

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