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Learn about the main types of cash flow, including operating, investing, and financing cash flow, as well as other cash flow ratios and concepts.
Cash flow, or the amount of money moving in and out of a business, is often treated as a single concept. However, it’s actually a bit more complex. Businesses may actually have three different types of cash flow: operating cash flow, investing cash flow, and financing cash flow. This is especially true for growing or established businesses, understanding each type of cash flow, and what it means for your business, can help you have a better grasp of your business’s financial health.
The three types of cash flow
To better leverage information about your company’s cash flow and use it to help your business grow, it’s a good idea to understand the three types. (This can also be helpful if you’re working with your banker to get customized advice for your business or creating a cash flow forecast.) Not all businesses will have all types of cash flow, but as your company grows, it might have more than one.
- Operating cash flow: This is the net cash generated from business operations, such as payments for selling goods and services, less the expenses that need to be paid to run the business.
- Investing cash flow: This type of cash flow comes from a company’s investments, including those it needs to run the business, minus the cost of those investments. These may include real estate, equipment, or assets the company buys, owns, or sells.
- Financing cash flow: This refers to the money a company gets from or pays to lenders, creditors, investors, or owners. Borrowing or repaying loans, issuing stock or bonds, and paying dividends are all elements of financing cash flow.
In addition to the types of cash flow, there are other important terms referring to cash flow that can be helpful to understand, including:
Free cash flow: The income that remains after the business has met its operating expenses and capital expenditures. Free cash flow is the remaining money on hand that can be used to pay creditors or dividends and interest to investors.
Discounted cash flow: This valuation method refers to how much a future investment is worth today and can help you see what the investment would be worth in the future, seeing the true value of the future investment in today’s terms.
How cash flow types affect businesses
Why do the different types of cash flow matter? Each represents a different kind of cash coming into the business, often for very different reasons. To illustrate how different types of cash flow affect different businesses, consider these examples:
Operating cash flow: A retail store relies on cash inflow from daily sales while a software company may get its revenue from subscription or license fees that customers pay monthly or annually. This income is used to pay expenses like payroll, rent, supplies, inventory, and others. Each business needs operating cash flow to run.
Investing cash flow: A capital-intensive business like a manufacturing company may have cash outflow because it needs to invest in new equipment like backhoes and cranes. However, it may also have a cash inflow because it sold old equipment to offset the cost. Similarly, a doctor’s office might invest in a new location, while also selling old equipment or devices.
Financing cash flow: A small event-marketing agency needs a loan or line of credit to hire staff and cover expenses to produce a big conference. The line of credit will be paid off after the event is complete and the client pays the final invoice. This influx of capital and the line of credit payoff make up financing cash flow, which can be particularly important for startups or companies in growth mode.
Types of cash flow and your business
Analyzing each type of cash flow may indicate your business’s different needs. A Wells Fargo Business banker may be a trusted guide, helping you understand the products and services that are right for your business, depending on the type of cash flow you need to manage. For example:
Operating cash flow. In addition to helping you find the right deposit accounts for your business, a Wells Fargo Business banker may help you determine how a merchant services account can help you offer more ways for customers to pay and help your business receive payments faster. To smooth seasonal ups and downs or the immediate cash demands on growing businesses, talk to your banker about loans or lines of credit that may offer a cash infusion to manage times when cash is tight.
Investing and financing cash flow. If your business needs to buy new equipment, make a big inventory purchase, or invest in a new building, a Wells Fargo Business banker can help you determine if an SBA loan may be the solution you need.
A Wells Fargo Business banker can help you explore the cash flow management solutions right for your business, from merchant accounts and lines of credit to business credit cards or commercial loans. Make an appointment with a banker to find out more about how Wells Fargo can support your business’s financial needs.
