5 min read

Cash flow: The meaning and the three types at a glance

Cash flow

Streamline your finances with Numarics' AI-powered solution

Cash flow is an important financial metric that reflects a company's financial health. It measures the inflow and outflow of cash and shows how well a company is able to meet its financial obligations and make investments. In this article, we will explain the importance of cash flow and provide an overview of the three different types.

The importance of cash flow


Cash flow is a key indicator of a company's financial stability and performance. Here are some reasons why cashflow matters:


1.     Liquidity Assessment: Cash flow allows companies to assess their liquidity and determine if they are able to pay their current liabilities. Adequate liquidity is crucial to sustain business operations.

2.    Investments and Growth: Positive cash flow ensures that a company has sufficient funds to make investments and take advantage of growth opportunities. Companies with a strong cash flow can finance new projects and grow their business.

3.    Creditworthiness: Banks and lenders examine cash flow to assess a company's creditworthiness. Solid cash flow increases the chances of getting credit because it shows the company's ability to meet its financial obligations.

4.   Dividend Payout: Solid cash flow allows a company to pay dividends and reward shareholders appropriately.


The three types of cash flow:


1.     Operating Cash Flow: Operating cash flow measures the inflow and outflow of cash from a company's operations. It includes income and expenses directly related to the company's core business, such as sales of products or services, payments to suppliers, salaries and tax payments. Positive operating cash flow is a sign that the company is generating cash from its core business. Negative operating cash flow indicates that the company is spending more money than it is earning, which can indicate financial problems.

2.    Investing Cash Flow: Investing cash flow refers to the inflow and outflow of cash from investing activities. This includes the purchase or sale of fixed assets such as land, buildings or machines, as well as investments in other companies. A negative investment cash flow indicates that the company is spending money on investments to acquire assets or expand the business. This spending can be beneficial in the long term as it can increase the growth and profitability of the business. Positive investment cash flow, on the other hand, means the company is generating money from asset sales or from investment income.

3.    Financing Cash Flow: Financing cash flow measures the inflow and outflow of cash from financing activities. This cash flow relates to activities such as raising or repaying debt, issuing or repurchasing stock, and paying dividends to shareholders. A positive financing cash flow indicates that the company is receiving more money from external sources than it is paying back. This can be done, for example, by taking out loans, selling stocks or receiving capital from investors. Negative financing cash flow, on the other hand, means the company is paying back or paying out more money to shareholders than it is taking in.


In conclusion, it is important to consider all three types of cash flow - operating, investing and financing cashflow - to get a comprehensive picture of a company's financial condition. By analyzing cash flow, companies can make informed decisions, improve their liquidity and make the best use of their financial resources to drive growth and success.

Sign up for our newsletter

Latest Blogs