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Session Length
~14 min
Adaptive Checks
13 questions
Transfer Probes
8
Cash flow systems describe how money moves into and out of a business over time. Unlike profit, which is an accounting measure, cash flow tracks the actual movement of dollars through three major channels: operating activities (day-to-day business), investing activities (buying or selling long-term assets), and financing activities (raising capital or repaying debt). Understanding these flows is essential for evaluating whether a company can pay its bills, fund growth, and survive economic downturns.
The cash flow statement is one of the three core financial statements, alongside the income statement and balance sheet. It reconciles the gap between reported earnings and actual cash on hand. A company can report strong profits while simultaneously running out of cash if customers pay late, inventory piles up, or capital expenditures drain reserves. Metrics like free cash flow, the cash conversion cycle, and burn rate give investors and managers a clearer picture of financial health than profit alone.
Mastering cash flow systems helps students think like financial analysts and business owners. Whether evaluating a startup runway, assessing a public company dividend sustainability, or planning personal finances, the ability to trace where cash comes from and where it goes is a foundational skill in finance and entrepreneurship.
One step at a time.
The movement of money into (inflows) and out of (outflows) a business or personal account over a specific period, representing actual liquidity rather than accounting profit.
Example: A freelancer earns $5,000 in January but pays $3,200 in expenses, yielding a positive cash flow of $1,800 for the month.
Cash generated or consumed by a company's core business activities such as selling goods, paying employees, and covering operating expenses.
Example: A bakery collects $20,000 from customers and pays $14,000 for ingredients, wages, and rent. Its operating cash flow is $6,000.
Cash spent on or received from long-term assets like equipment, property, or investments in other companies.
Example: A company spends $50,000 on new machinery (outflow) and sells an old delivery truck for $8,000 (inflow), resulting in net investing cash flow of -$42,000.
Cash movement related to funding the business -- issuing stock, borrowing or repaying loans, and paying dividends to shareholders.
Example: A startup raises $200,000 from investors (inflow) and repays $30,000 on a bank loan (outflow), yielding net financing cash flow of $170,000.
The cash remaining after a company covers operating expenses and capital expenditures, representing money available for expansion, debt repayment, or distributions.
Example: If operating cash flow is $500,000 and capital expenditures are $150,000, free cash flow is $350,000 -- the amount the company can freely deploy.
A financial report that summarizes all cash inflows and outflows during a specific period, organized into operating, investing, and financing sections. It bridges the gap between the income statement and the actual cash position shown on the balance sheet.
Example: A quarterly cash flow statement shows positive operating cash flow, negative investing cash flow from equipment purchases, and negative financing cash flow from dividend payments.
The number of days it takes a company to convert its investment in inventory and other resources into cash from sales. Calculated as days inventory outstanding plus days sales outstanding minus days payable outstanding. A shorter cycle means faster cash recovery.
Example: A retailer holds inventory for 30 days, collects payment in 15 days, and pays suppliers in 40 days, giving a cash conversion cycle of 5 days (30 + 15 - 40).
The rate at which a company spends its cash reserves. Gross burn rate is total monthly cash spending; net burn rate subtracts incoming revenue. Burn rate determines a company runway, or how many months it can survive before needing additional funding.
Example: A startup spends 150,000 per month and earns 40,000 in revenue, giving a net burn rate of 110,000. With 660,000 in the bank, its runway is 6 months.
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