Calculating cash flow means making a company’s actual movement of money visible: how much cash flowed in and out over a period? That number often says more about financial health than reported profit does — because invoices are paid with money, not with book profits.
This guide covers the definition, the three types of cash flow, the direct and indirect method with a formula and worked example, and closes by separating three things that get used interchangeably and are not the same: profit, cash flow and liquidity.
What is cash flow? A definition
Cash flow is the balance of all cash inflows and outflows over a period. Put simply, it shows how much money a business actually generates or consumes under its own steam. The only test that matters is whether cash moved — an invoice you have issued raises cash flow when the money lands in the account, not when the invoice is written.
That is precisely what separates it from an earnings measure like profit. Non-cash items — depreciation, provisions, changes in inventory valuation — move profit but do not touch the period’s cash flow directly. Cash flow is therefore a measure of self-financing power: how much money does day-to-day operation produce to cover investment, debt repayment and distributions?
The three types of cash flow
The cash flow statement splits cash flow by origin into three sections. Only together do they explain how the cash balance changed over the period.
| Type | Origin | Examples |
|---|---|---|
| Operating cash flow | Day-to-day business | Customer payments, suppliers, wages, tax |
| Investing cash flow | Fixed assets | Buying or selling machinery, shareholdings |
| Financing cash flow | Equity and debt | Borrowing, repayment, capital injections, dividends |
Operating cash flow is the most important of the three: it shows whether the core business earns money on its own. Investing cash flow is usually negative in a healthy, growing company, because it is investing. Financing cash flow captures dealings with banks and shareholders. The sum of all three equals the change in the cash balance between the start and the end of the period.
Read together they also tell a story that no single figure does. Strong operating cash flow funding negative investing cash flow is a company financing its own growth. Weak operating cash flow propped up by positive financing cash flow is a company financing its operations from the bank — sustainable for a while, and worth knowing about early.
Calculating cash flow: direct and indirect
For operating cash flow there are two routes to the same answer: the direct and the indirect method.
The direct method simply sets all receipts of the period against all payments:
| Operating cash flow (direct) | Σ receipts − Σ payments |
The indirect method is more common in practice because it starts from figures the income statement already gives you. It begins with net income and strips out the non-cash items:
| Step | Illustrative values (€) |
|---|---|
| Net income | 120,000 |
| + Depreciation and amortisation | + 80,000 |
| + Increase in provisions | + 15,000 |
| − Increase in receivables | − 45,000 |
| + Increase in trade payables | + 20,000 |
| = Operating cash flow | 190,000 |
The values above are generic illustrative figures shown only to demonstrate the mechanics. The pattern, however, is general: non-cash expenses such as depreciation and additions to provisions are added back to net income, non-cash income is deducted, and movements in working capital — receivables, inventory, payables — are adjusted accordingly. The direction of those working-capital adjustments is where most mistakes happen, and the logic is worth stating plainly: a rise in receivables means you invoiced more than you collected, so cash is lower than profit and the movement is deducted. A rise in payables means you bought more than you paid for, so cash is higher than profit and the movement is added. In the example above the two net to a €25,000 increase in working capital, which is why €215,000 of adjusted profit becomes €190,000 of cash. As a rule of thumb:
| Cash flow (indirect) | Net income + non-cash expenses − non-cash income − increase in working capital |
LiquidityLens derives a week-by-week 13-week outlook from your real bank movements and open items — your cash flow history projected forward.
See the Liquidity Control SprintProfit ≠ cash flow ≠ liquidity
These three get mixed up constantly, and they measure different things — a misunderstanding that is one of the most common reasons companies hit payment difficulties with full order books.
- Profit is an accrual measure from the income statement. It arises with performance, whether or not money has moved, and it contains non-cash items such as depreciation.
- Cash flow measures only real movements of money over a period — what actually came in and went out.
- Liquidity is a point-in-time figure: the means of payment available right now, including undrawn credit lines.
An example makes the difference concrete. A company completes a profitable project and books the profit. As long as the customer invoice is unpaid, that profit has produced no cash flow whatsoever — and if wages and suppliers fall due in the meantime, liquidity can get tight while the income statement is comfortably in the black. Black numbers do not protect you from a red bank account.
That is where forward-looking planning takes over. Historical cash flow shows how money has moved so far. What matters for steering the business is when money will move next. A 13-week cash forecast projects the cash flow history forward week by week; the balance-sheet measures of solvency are covered in the overview of liquidity ratios, and the full method in the guide to cash flow forecasting.
A weekly grid for receipts and payments with an automatic low-point warning — the bridge from cash flow to day-to-day liquidity control.