Short answer: cash flow is the cash coming in minus the cash going out in a period. Profit counts a sale when you invoice it; cash flow counts it when the money arrives. That gap is why a profitable company can still run out of cash.
Owners are often surprised by it: the profit and loss statement says the month went well, but the bank account is empty. Usually nothing is wrong with the numbers. They measure different things.
Why can a profitable business run out of cash?
Take a month where you invoice a customer 10,000 for work done, and pay 6,000 in wages and rent:
| Profit (when invoiced) | Cash (when paid) | |
|---|---|---|
| March: invoice sent, costs paid | +4,000 | −6,000 |
| May: customer pays | 0 | +10,000 |
| Total | +4,000 | +4,000 |
By May both say the same. In March and April, though, the business is 6,000 short in cash while showing a profit. Grow fast with customers who pay late, and those gaps stack up.
What are the three kinds of cash flow?
The cash flow statement (IAS 7 under IFRS) splits cash into three kinds of activity:
| Kind | What it covers | Example |
|---|---|---|
| Operating | Running the business | Cash from customers, wages, rent |
| Investing | Long-term assets | Buying machines or software |
| Financing | Money from or to owners and lenders | A loan, its repayment, dividends |
How do you calculate operating and free cash flow?
The formulas as KPI Atlas gives them:
| KPI | Formula |
|---|---|
| Operating cash flow | Net income + Non-cash expenses ± Changes in working capital |
| Free cash flow | Operating cash flow − Capital expenditure |
Free cash flow is the cash left after running the business and investing in it, free to pay debt, pay owners or grow. In DAX:
Operating Cash Flow = [Net Income] + [Non Cash Expenses] - [Change in Working Capital]
Free Cash Flow = [Operating Cash Flow] - [Capex]Operating cash flow in Excel:
=NetIncome + Depreciation - (dReceivables + dInventory - dPayables)How can cash flow look better than it is?
- Paying suppliers late at period end makes operating cash flow look stronger for one report.
- Cutting needed investment raises free cash flow now and costs growth later.
Read cash flow over several periods, never one, and next to the cash runway: burn rate and cash runway shows how many months the cash lasts.
Where can you check this?
Can you get the formulas for your report?
KPI Atlas has operating cash flow, free cash flow and the related KPIs, each with its definition, formula, DAX, SQL and Excel, the mistakes to avoid and the charts that show it best. It holds 455 KPIs for 30 areas of a business.
