Cash flow (or cash flow) is the difference between income and expenses over a period of time. It is an essential measurement tool that finds out the financial position of an organization. Cash flow can be either positive or negative, which is why it is important to pay attention to it on a frequent basis. If it appears that a company’s expenses are higher than its revenues, it can cause problems. Regular monitoring of cash flow can prevent money problems (such as being unable to pay fixed expenses or getting into debt). There are three main categories of cash flow:

1. Operating cash flow: This refers to the cash flows that come from a company’s core activities, such as selling products or services and receiving payments from customers. Operating cash flow is an important indicator of a company’s day-to-day financial performance.
2. Investment cash flow: This includes the cash flows associated with fixed asset investments, such as the purchase of equipment, buildings or stock. Investment can include both outward cash flows (asset purchases) and inward cash flows (asset sales).
3. Financing cash flow: This refers to the cash flows associated with financing activities, such as raising loans, issuing shares or paying dividends to shareholders. Financing cash flow reflects how the company finances its operations and can be an indication of its financial stability and debt position.

How do you calculate cash flow?

Cash flow can be calculated by using the formula below:

Incoming money – outgoing money = cash flow

Note: It is essential in the calculation to include all income and expenses; this includes taxes. As long as there is a constant cash flow, more capital can always be gained. However, it is essential here to know the difference between an ”asset” and ”liability.” A concise definition of both terms is as follows:

• Asset: a purchase or investment that (indirectly) makes money or increases in value;
• Liability: a purchase or expense that (indirectly) costs money or depreciates in value.

What is important to know when calculating cash flow?

From the explanation, it becomes clear that it is important for a company to have as many assets as possible and limit liabilities as much as possible. By investing in assets, capital can be earned in the long run where the earnings come directly from the investment made. That is, these earnings cannot be realized without making the investment. It is important to note that an investment can also lead to a (temporary) loss. There are always risks associated with an investment. Therefore, making informed decisions and factoring in the potential risks is hugely important. Conducting sufficient research, risk management and seeking professional advice are ways to ensure that risks can be minimized. Indeed, based on this information, appropriate decisions can be made.

Examples of assets and liabilities

In the context of credit management the following assets and liabilities can be assigned to the following purchases:

• Assets: credit management software, personnel and accounts receivable management;
• Liabilities: lease car and rental property.

Comment assets: investing in accounts receivable management software ensures that tasks are performed more effectively. This leads to a more efficient way of working in which, in most cases, money and time are saved on operations. This time can be spent on other work that focuses on generating more revenue. An investment is earned back if (in the long run) money and time is saved that can be used for other business purposes. Money that ”stands still” in most cases produces nothing. Of course it is important to have a buffer in case of unforeseen costs.