Cash flow: definition, calculation and importance for the business
Master your cash flows: definition, types (operational, investment, financing), calculation and tools. Essential for managing your cash flow and financing your growth.
Co-founder and CFO, Iter Advisors
Remember in 30 seconds
Cash flow tracks money received and paid out. Their variation is added to the opening balance. A forecast specifies the dates, hypotheses and possible tensions; it does not guarantee collection or financing.
1. Definition and importance
Cash flow measures the movement of real money into and out of your business. Unlike the accounting result (which can be manipulated by provisions, depreciation), the cash flow shows whether you really have cash in the bank.
Why is this critical?
- Profit and cash flow are not the same. You can be profitable on paper but in reality in a liquidity crisis (eg: invoicing 30 days, supplier payments 7 days = negative cash flow).
- Context matters. A negative flow can finance an investment; a positive flow can come from a loan. Examine its cause and the available balance.
- Cash finances growth. To recruit, invest, launch a product, you need cash. Profits come too late.
Distinguish prediction and certainty
2. The three types of flow
A company's cash flow is affected by three categories of activities:
| Flow type | Definition | Example |
|---|---|---|
| Operational flow | Inputs/outputs linked to current activity (sales, purchases, salaries, expenses) | Customer sales (+), supplier payments (-), salaries (-) |
| Investment flow | Acquisition/disposal of assets (equipment, real estate, acquisitions) | Machine purchase (-), equipment sale (+), paid acquisition (-) |
| Funding flow | Borrowings, repayments, fundraising, dividends | Bank loan (+), credit repayment (-), fundraising (+) |
Simple formula:
Cash flow variation = Operating flow + Investment flow + Financing flow
3. How to calculate your flows
There are two methods: the direct method and the indirect method. For an SME, here is the practical method:
Operational flow (simplified):
- Sales collected (not sales invoiced!)
- Less: Purchases disbursed
- Less: Salaries disbursed
- Less: Cash costs (rent, energy, insurance, etc.)
Fictitious educational example, monthly amounts:
- Sales collected per month: €300k (average 30-day billing)
- Purchases disbursed: €120k
- Salaries: €100k
- Other charges: €40k
- Operational flow = 300 - 120 - 100 - 40 = €40k
Monitoring adapted to your deadlines
4. The cash flow forecast
The cash flow forecast is the most important tool for an entrepreneur. It allows you to project your flows over 3-6-12 months and identify periods of tension.
Simple structure:
- Expected collections (sales, credits, raises)
- Expected disbursements (purchases, salaries, taxes, debt repayments)
- Change in cash flow = Receipts - Disbursements
- End of period balance = Opening balance + Cash change
If the expected balance falls below your safe threshold, review assumptions, deadlines and possible financing solutions before the relevant date.
Our support in 13-week cash flow forecasting presents the data to prepare, a fictional example and the deliverables to frame.
5. Managing and optimising WCR
The WCR represents the financing requirement linked to the operating cycle. It depends in particular on inventories, receivables and operating debts; it cannot be reduced to a difference between two deadlines.
Formula: WCR = (Stock + Customer receivables) - Supplier debts
Example:
- Fictitious example without stock: open customer receivables = €400,000
- Open supplier debts = €180,000
- BFR = 400 - 180 = €220k of “frozen” cash
To reduce the WCR (and free up cash):
- Track receipts: invoice without delay, resolve disputes and confirm deadlines
- Examine supplier deadlines: negotiate in compliance with applicable rules and agreements
- Optimise inventory: Less stock = less frozen cash
6. Tools and management
Essential tools:
- Excel / Google Sheets: Basic, but works for startups
- Agicap: Cloud-native, AI forecasts, automatic banking integration
- Fygr: Lean, perfect startups, modern design
- Pennylane: Integrated accounting + treasury
We detail the differences in price, implementation and scope in our comparison of treasury software.
Cash management checklist:
- ☐ Cash balance updated daily (automatic if cloud tools)
- ☐ Forecast 3-6 months updated weekly
- ☐ Automated bank reconciliation
- ☐ Alerts if balance < minimum security threshold
- ☐ Weekly review with the CFO
On the AI layer applied to cash flow forecasting, see our guide AI and automation of the finance function.
Are you not in control of your cash flow?
Describe your deadlines, your tools and the data available to frame a forecast and its monitoring. The scope and deadlines are defined before starting.
Describe my cash flow needsConclusion: cash flow is your survival
Useful monitoring makes uncertainties visible, assigns updates, and prepares decisions. Its effect depends on the quality of the data and the actions actually undertaken.
Action plan:
- Calculate your current operational flow (weekly)
- Estimate your WCR and identify reduction levers
- Set up a 3-month forecast (Excel or cloud tool)
- Update weekly
- Act on insights (contact customers, negotiate suppliers, reduce stock)
At Iter Advisors, we support each client with cash flow. This is often where we create the most value: securing cash, financing growth, avoiding crises.
