What is Cash Flow? A Detailed Review

Cash flow is the movement of cash into and out of a business. OpenStax's Principles of Accounting defines it as "cash receipts and cash disbursements as a result of business activity". Cash that comes in is an inflow, cash that goes out is an outflow, and the difference over a period is the net cash flow. Accountants sort cash flows into three types: operating, investing and financing.

Billed publishes this page. Definitions are quoted from OpenStax, Principles of Accounting, Volume 1: Financial Accounting, chapter 16, opened on October 30, 2026. This page explains what cash flow is and its types. For the financial statement itself, see what is a cash flow statement, and for forecasting and managing cash, see how to manage cash flow.

Cash Inflows and Outflows

Every cash flow is either money in or money out:

• Inflows: payments from customers, cash from selling equipment, a loan you receive, money an owner puts into the business.
• Outflows: rent, wages, payments to suppliers, buying equipment, repaying a loan.

OpenStax's chapter 16 key terms define net cash flow as the "method used to determine profitability by measuring the difference between an entity’s cash inflows and cash outflows". When inflows are larger than outflows, net cash flow is positive. When outflows are larger, it's negative.

Cash flow isn't the same as profit, because a sale can be recorded before the customer pays. The cash flow statement page explains how the two are reconciled.

The Three Types of Cash Flow

OpenStax's key terms define each type as a transaction "reported on the statement of cash flows":

• Operating activities: a "cash business transaction reported on the statement of cash flows that relates to ongoing day-to-day operations". Examples: customer payments, wages, rent, supplier bills.
• Investing activities: a "cash business transaction reported on the statement of cash flows from the acquisition or disposal of a long-term asset". Examples: buying or selling equipment, a vehicle or a building.
• Financing activities: a "cash business transaction reported on the statement of cash flows that obtains or retires financing". Examples: taking out a loan and repaying its principal.

Sorting cash flows this way shows where the cash came from. A business whose cash rises only because it borrowed is in a different position from one whose day-to-day operations bring in more than they cost.

Two Ways to Show Operating Cash Flow

OpenStax describes two methods:

• Direct method: an "approach used to determine net cash flows from operating activities, whereby accrual basis revenue and expenses are converted to cash basis collections and payments".
• Indirect method: an "approach used to determine net cash flows from operating activities, starting with net income and adjusting for items that impact new income but do not require outlay of cash".

OpenStax's section 16.6 says that "the net cash flows for all sections of the statement of cash flows are identical when using the direct method or the indirect method." The worked example below lists the actual cash received and paid, as the direct method does. The cash flow statement page works through the indirect method.

Worked Example: One Month of Cash for a Bakery (sample figures)

These are sample figures for a fictional bakery, invented for this example. It starts the month with $9,000.00 in the bank.

Operating activities

• Cash received from customers: +$18,400.00
• Paid to flour and ingredient suppliers: −$6,200.00
• Wages paid: −$5,800.00
• Rent paid: −$2,000.00
• Net cash from operating activities: $18,400.00 − $6,200.00 − $5,800.00 − $2,000.00 = $4,400.00

Investing activities

• Bought a new oven: −$3,500.00
• Net cash from investing activities: −$3,500.00

Financing activities

• Repaid loan principal: −$600.00
• Net cash from financing activities: −$600.00

Net cash flow for the month: $4,400.00 − $3,500.00 − $600.00 = $300.00

Cash at the end of the month: $9,000.00 + $300.00 = $9,300.00

The month's net cash flow is positive. Operating activities brought in $4,400.00, and $3,500.00 + $600.00 = $4,100.00 of it went on the oven and the loan repayment. In a month without the oven purchase, the same operating cash would have left $4,400.00 − $600.00 = $3,800.00.

Related Measures

• Free cash flow: OpenStax defines it as "operating cash, reduced by expected capital expenditures and by cash dividends payments"; see what is free cash flow.
• Working capital: current assets minus current liabilities, a balance at one date rather than a flow; see what is working capital.
• Cash flow figures across small businesses: see cash flow statistics.

Where Billed Fits

Billed's invoice software page says: "When a client pays by check or cash, record it as an offline payment so all your income is in one place." Billed's financial reporting page says: "Billed offers several built-in reports: Invoice Reports (paid, partially paid, and overdue), Expense Reports, Income vs Expense Reports, Top Selling Products, and Time Tracking Reports." A cash flow statement isn't among the reports that page lists, so ask your accountant or use accounting software for one.

When This Guide Isn't for You

If you need a statement of cash flows for lenders, investors or a tax return, or your business has loans, leases or owner withdrawals to classify, ask your accountant how each item is reported.

Related Guides

• What is a cash flow statement?
• How to manage cash flow
• What is free cash flow?
• What is working capital?
• Cash flow statistics

FAQ

What is cash flow?

OpenStax defines cash flow as "cash receipts and cash disbursements as a result of business activity": the cash a business takes in and pays out.

What are the three types of cash flow?

Operating, investing and financing. OpenStax describes operating activities as relating to "ongoing day-to-day operations", investing activities as coming "from the acquisition or disposal of a long-term asset", and financing activities as those that obtain or retire financing.

What is net cash flow?

It's the difference between cash inflows and cash outflows over a period. In this page's sample, the bakery's operating, investing and financing cash flows add up to a net cash flow of $300.00 for the month.

What is the difference between the direct and indirect method?

Both work out net cash flow from operating activities. The direct method converts revenue and expenses to cash collections and payments, and the indirect method starts with net income and adjusts it. OpenStax says the net cash flows are identical under both methods.