When it comes to assessing your company’s financial health, cash flow management is key. However, cash flow is not just a single number – it is comprised of three separate types: operational, investing, and financing cash flows. Each offers insight into a distinct facet of your company’s financial activity.
Here’s a quick rundown of all three types and why cash flow matters.
- Operating Cash Flow: This reflects the cash created by your core business operations, which is simply the money that comes in and goes out from selling items or services. It’s an important measure of whether your business can survive in the short run. Strong operating cash flow indicates that your company is generating enough cash to meet expenses such as labor, rent, and inventory.
- Investing Cash Flow: Investing activities include buying and selling long-term assets such as equipment, real estate, or investments. Negative investment cash flow isn’t always a negative sign, as it could indicate that you’re investing in growth. However, consistently high outflows of cash without corresponding returns may indicate that the company is overextending itself.
- Funding Cash Flow: This form of cash flow demonstrates how your company raises capital and repays it. It covers things like issuing shares, taking out loans, and paying dividends. Regular cash flow management allows you to understand how your company is funded and how you manage debt.
Why Cash Flow Management Matters
Looking at just one type of cash flow provides an incomplete picture. For example, positive operating cash flow with negative investing cash flow could indicate healthy expansion, while positive financing cash flow but negative operating cash flow could point toward a faltering corporation propped up by debt. Ultimately, cash flow management allows you to monitor all three to make better decisions, reduce risk, and keep your company financially healthy.