Cash Flow Terms in Plain English: Your Translation Guide

One of the three core financial statements, alongside the income statement and balance sheet. It records all actual cash inflows and outflows during a period, organized into three categories: operating, investing, and financing activities. Unlike the income statement, which records revenue when earned, the cash flow statement only records cash when it physically moves (FASB ASC 230).

The first and most important section of the cash flow statement. It captures cash generated or consumed by the core business operations: collecting from customers, paying suppliers, paying employees, and covering routine operating expenses. Strong, consistently positive operating cash flow is the primary indicator of a financially healthy business. It is different from net income because it accounts for timing: when customers actually pay, not just when revenue is recognized.

The second section covers cash used to purchase or received from selling long-term assets: equipment, property, vehicles, or investments in other businesses. A growing business typically shows negative investing cash flow because it is spending cash on assets that will generate future value. This is not inherently a warning sign — context matters. A business spending $80,000 on equipment while generating $200,000 in operating cash flow is in a very different position from one spending $80,000 on equipment while operating cash flow is negative.

The third section covers cash movements related to how the business is funded: loan proceeds received, loan principal repaid, equity contributions from owners, and distributions or dividends paid out. A business drawing on a line of credit will show that draw as a positive financing cash flow; repaying it shows as negative. Neither is inherently good or bad — the pattern over time tells the more useful story.

The bottom line of the cash flow statement: the sum of operating, investing, and financing cash flows. Added to the beginning cash balance, it produces the ending cash balance, which should match the cash line on the balance sheet for the same period. A negative net change in cash is not automatically a problem — a business investing heavily in growth may show negative net cash change while operating activities remain strongly positive.

The most common presentation in US financial reporting. It begins with net income and then makes a series of adjustments to reconcile profit to actual cash: adding back non-cash expenses like depreciation, and adjusting for changes in working capital accounts (accounts receivable, accounts payable, inventory). The result is operating cash flow. Most accounting software generates this format by default. It is useful because it shows explicitly why profit and cash differ.

The alternative presentation, preferred by FASB but rarely used in practice because it requires more detailed record-keeping. It lists actual cash collections from customers, cash paid to suppliers, cash paid for wages, and other cash operating items directly, without starting from net income. Both methods produce identical operating cash flow totals. The direct method is more intuitive but less common.

Depreciation is an income statement expense that reduces net income but involves no cash payment in the period it is recorded. The cash was spent when the asset was purchased; depreciation simply allocates that cost over time. In the indirect method cash flow statement, depreciation is added back to net income because it reduced profit without reducing cash. This is one of the most common sources of confusion between profit and cash — a business with significant fixed assets may show lower profits but strong cash flow precisely because depreciation is a non-cash charge.

Current assets minus current liabilities. It measures whether a business has enough short-term resources to cover its short-term obligations. Positive working capital means the business can pay its near-term bills from its near-term assets. Negative working capital is a warning sign that short-term liabilities exceed short-term assets — though for some business models (like certain retail operations with fast inventory turns and extended payables) it can be managed sustainably. Formula: Current Assets − Current Liabilities.

Revenue that has been earned and invoiced but not yet received as cash. An increase in accounts receivable between two periods is subtracted in the indirect method cash flow statement because it means the business recognized revenue it has not yet collected. High and growing AR is the primary mechanism by which profitable businesses run short on cash — the income statement shows the revenue; the cash flow statement shows it has not arrived yet (FASB ASC 310).

Expenses that have been incurred and recorded but not yet paid in cash. An increase in accounts payable is added back in the indirect method because it means the business recorded an expense without yet paying cash for it. Strategically managing AP — paying within terms but not before — is a legitimate and commonly used tool for preserving cash. Consistently paying late damages supplier relationships and can result in lost credit terms.

For product-based businesses, inventory represents cash that has been converted into goods waiting to be sold. An increase in inventory consumes cash without immediately generating revenue or a corresponding payable reduction. Managing inventory levels is a significant lever for cash flow in product businesses — excess inventory ties up cash that could otherwise cover operating needs.

Cash collected from customers before the related service or product has been delivered. Common in subscription businesses, retainer arrangements, and advance-payment contracts. It is a liability on the balance sheet (you owe the customer the work) but a positive for cash flow — the cash is already in hand. An increase in deferred revenue is added in the indirect cash flow method because cash was received before revenue was recognized.

Obligations that have been incurred during the period but have not yet been invoiced by the supplier or paid in cash — payroll earned but not yet paid, utilities consumed but not yet billed, interest accrued on a loan. An increase in accrued liabilities is added in the indirect method because the expense reduced net income without reducing cash. When these liabilities are eventually paid, cash goes out.

Operating cash flow minus capital expenditures. It measures how much cash a business generates after accounting for the investment required to maintain or expand its asset base. Free cash flow is what is available for debt repayment, owner distributions, acquisitions, or building reserves. A business can have strong operating cash flow but limited free cash flow if it requires significant ongoing capital investment. Formula: Operating Cash Flow − Capital Expenditures.

Operating cash flow divided by current liabilities. It measures whether the business generates enough cash from operations to cover what it owes in the short term. A ratio above 1.0 means operating activities generate more cash than the current liabilities require. Lenders and financial advisors use this ratio to assess whether a business's cash generation is sufficient to service its obligations without relying on financing. Formula: Operating Cash Flow ÷ Current Liabilities.

The number of days between when a business pays for inputs (inventory, labor, materials) and when it collects cash from the resulting sale. A shorter cycle means cash moves through the business faster, reducing the need for working capital financing. A longer cycle means cash is tied up longer, increasing risk. Formula: Days Inventory Outstanding + Days Sales Outstanding − Days Payable Outstanding.

The average number of days between issuing an invoice and receiving payment. A rising DSO is one of the clearest early warning signs of a developing cash flow problem — customers are taking longer to pay, which extends the gap between earned revenue and available cash. Calculated by dividing accounts receivable by average daily revenue. Formula: (Accounts Receivable ÷ Annual Revenue) × 365.

The average number of days between receiving a supplier invoice and paying it. A higher DPO means the business is holding on to cash longer before paying suppliers — which can be a deliberate working capital management strategy, up to the point where it strains supplier relationships or results in late fees. Formula: (Accounts Payable ÷ Cost of Goods Sold) × 365.

The number of months a business can continue operating at its current cash consumption rate before exhausting its cash reserves. Calculated by dividing current cash balance by average monthly net cash outflow. A runway of three months or less is typically considered a crisis threshold. Three to six months is cautious. More than six months provides meaningful strategic flexibility. Formula: Cash Balance ÷ Monthly Net Cash Burn.

The rate at which a business consumes its cash reserves, expressed as a monthly figure. Gross burn rate is total monthly cash outflows. Net burn rate is monthly outflows minus monthly inflows — the actual net cash consumed per month. Burn rate is most commonly discussed in the context of early-stage businesses or organizations in a seasonal trough, but it is a useful metric for any business assessing its cash position and runway.

A week-by-week projection of all expected cash inflows and outflows for the next 13 weeks (approximately three months). It is the standard short-term cash management tool used by CFOs, turnaround advisors, and lenders assessing a business's near-term liquidity. Unlike annual budgets, which are often built on revenue assumptions, the 13-week forecast starts from known commitments: scheduled payments, confirmed receivables, fixed payroll dates, and known bills. Thursday's post covers how to build one from scratch.

A forecast that is updated regularly so that it always covers the same forward time horizon. A rolling 13-week forecast, updated weekly, always shows the next 13 weeks from the current date. This is different from a static forecast, which covers a fixed period (like a fiscal year) and becomes less useful as time passes. Rolling forecasts are the standard in active cash flow management because they maintain a consistent forward view.

All expected cash receipts during a forecast period: customer payments (from existing AR and expected new invoices), loan proceeds, owner contributions, asset sale proceeds, and any other source of cash. In a weekly cash flow forecast, inflows are projected by week based on invoice due dates, payment history, and known upcoming receipts. Forecasting inflows accurately requires knowing your customers' actual payment behavior, not just their stated terms.

All expected cash payments during a forecast period: payroll, rent, supplier payments, loan repayments, tax payments, insurance premiums, and all other cash expenses. Outflows are generally more predictable than inflows because many are fixed, recurring, and due on known dates. The discipline of a 13-week forecast is largely about surfacing the weeks where outflows significantly exceed inflows, with enough lead time to act.

A predetermined threshold — typically set by management or required by a lender covenant — below which the cash balance should not fall. Operating with a minimum cash balance discipline prevents the business from discovering a cash problem only when it is unable to meet a payment. The appropriate minimum varies by business size, revenue predictability, and access to credit, but a common starting point is at least two weeks of operating expenses.

The degree to which a business can convert its assets to cash quickly without significant loss of value. Cash itself is perfectly liquid. Accounts receivable are highly liquid (assuming collectible). Equipment and real estate are illiquid — they take time to sell and may not fetch full value quickly. A business with strong liquidity can absorb unexpected cash demands; one with low liquidity is vulnerable to timing shocks even if its assets appear substantial on paper.

A revolving credit facility that allows a business to borrow up to a pre-approved limit, repay, and borrow again as needed. Used primarily to bridge temporary cash flow gaps — covering payroll during a slow-collection week, for example, while waiting for AR to clear. The best practice is to establish a line of credit during a period of financial strength, before it is needed, because approval criteria are significantly more favorable when the business is healthy. Interest accrues only on the amount drawn.

A financing arrangement in which a business sells its outstanding invoices to a third party (a factor) at a discount in exchange for immediate cash. The factor then collects from the customer directly. Factoring converts AR to immediate cash but at a cost: factoring fees typically range from 1% to 5% of the invoice value. It is most commonly used by businesses with strong AR but limited access to traditional bank credit, or those with urgent cash needs that cannot wait for normal collection cycles.

Cash spent on assets that will be used over multiple years: equipment, vehicles, furniture, leasehold improvements, technology infrastructure. CapEx appears in the investing section of the cash flow statement, not as an operating expense. This is why a business can show strong operating profit and strong operating cash flow and still see its total cash decline significantly — major equipment purchases are not operating expenses but they absolutely consume cash.

The combined cash required for both principal repayment and interest payments on outstanding debt obligations during a given period. Debt service is a fixed cash outflow that must be covered regardless of business performance. Lenders evaluate a business's ability to cover debt service using the Debt Service Coverage Ratio: operating cash flow divided by total debt service payments. A ratio below 1.0 means the business does not generate enough cash to cover its debt obligations from operations.