Those who only look at a company's profit often overlook how liquid, stable or healthy it really is. Cash flow shows how much money is actually "flowing" in the company and, above all, where it comes from and where it is going. There is not just one cash flow, but several types of cash flow. Each of these key figures tells its own story about the daily business, growth and capital structure of a company.

In this article, we take a closer look at the different types of cash flow, explain what they mean, what you should look out for and why free cash flow is of particular interest to many investors.

What is cash flow? Explained briefly and clearly

Before we go into the different types of cash flow, we would like to briefly refresh the definition. The term "cash flow" refers to the actual cash flow within a company, i.e. the sum of all cash inflows and outflows in a given period. In contrast to accounting profit, which also takes into account accounting effects such as depreciation or provisions, it shows how much money is actually available.

This makes it one of the most important key figures when it comes to a company's Cash position and solvency. After all, even a profitable company can get into difficulties if there are not enough liquid funds to cover running costs.

In short, it provides information on whether and how well a company is able to survive financially on its own, regardless of accounting tricks or one-off effects on the balance sheet.

The three types of cash flow at a glance

A company's total cash flow can be divided into three main areas. The individual cash flow types shed light on different areas of corporate financing and together they provide a complete picture of cash flows. It depends on where the money comes from and what it is used for.

Operating cash flow (cash flow from operating activities)

The operating cash flow shows how much money the company generates through its core business, i.e. from the sale of products or services, less current operating expenses. This includes, for example, salaries, rent, material costs or taxes. A consistently positive operating cash flow is a good sign: The company can finance itself from its own resources without having to rely on loans loans or the sale of assets.

Cash flow from investing activities

This type of cash flow includes all payments relating to investments in fixed assets, for example the purchase or sale of machinery, buildings, vehicles or investments. A negative investment cash flow is not necessarily a bad thing, as it can indicate that the company is investing in its future. The decisive factor is whether these investments also generate income.

Cash flow from financing activities

Cash flow from financing activities shows how the company finances itself, for example by taking out loans, repaying loans, increasing capital or distributing dividends. A positive cash flow in this area often means that new capital is flowing into the company, while a negative one can indicate repayments or distributions. Here too, the valuation depends on the overall context.

Free cash flow - the scope for real decisions

Free cash flow is one of the most meaningful key figures among the various types of cash flow. types of cash flow. It provides particularly precise information on how much financial leeway a company actually has. It shows how much money is actually left over after deducting all running costs and investments, i.e. the amount that the company can use freely without having to rely on external funding.

The free cash flow is usually calculated as follows:

Operating cash flow - expenditure on investments = free cash flow

The company can use what is left over to repay debts, pay dividends, build up reserves or for new strategic projects, for example. Depending on the industry and company phase, free cash flow can also be used in different ways: for example, to finance growth in start-ups or to stabilize established SMEs. The important thing is that it provides flexibility and reduces dependence on banks or external capital.

This value is particularly relevant for investors: It shows whether the business model is sustainable and whether real value is being created. After all, a company that regularly generates surpluses that exceed its investments has real financial leeway and this is ultimately often more important than pure sales or profit figures.

Why the distinction between cash flow types is important

While the sum of all cash flows merely shows whether more money has flowed in or out at the end of a period, the individual cash flow types provide more information. cash flow types provide crucial information on the origin and use of these funds.

For example, two companies could have the same positive total cash flow. However, while one has generated the surplus from day-to-day operations, the other has generated it from the sale of assets or a loan. Cash position yes - but a completely different starting position.

The distinction is therefore crucial for investors, lenders and management:

• The operating cash flow shows how well day-to-day business is going.
• The investment cash flow provides an insight into the future strategy.
• The financing cash flow reveals how stable or dependent the capital structure is.

Only those who look at the different types of cash flow individually can assess how solidly a company is positioned, whether investments can be made from its own resources and whether there are financial bottlenecks. bottlenecks are imminent.

Cash flow types in practice: a simple example

To understand how the different cash flow types interact, it helps to take a brief look at a practical example. Let's imagine a medium-sized production company:

• It sells machines and generates an annual turnover of € 1,200,000. After deducting salaries, rent, materials and taxes, an operating cash flow of € 300,000 was calculated.
• In the same period, the company invested € 150,000 in new production facilities. This is reflected as a negative amount and is calculated as cash flow from investing activities.
• In addition, it has taken out a loan of € 200,000. This amount has a positive impact on cash flow from financing activities.

The overview:

This simplified example shows: It is not just the account balance, but the origin and use of funds that says something about the economic substance of a company. Looking at individual figures in isolation is not enough. Only the composition of cash flows provides a realistic picture. This is why every balance sheet analysis should be supplemented - whether for investment decisions, loan negotiations or internal controlling.

Conclusion: Reading cash flow types correctly means understanding the company

Cash flow is more than just a figure in the financial overview: it is a window into the actual economic reality of a company. While profit is often distorted by accounting effects, the cash flow shows how much money is really available and where it comes from. Anyone who understands and specifically analyzes the individual types of cash flow - operating, investing and financial - can recognize at an early stage whether a company is operating healthily, overinvesting or is dependent on external financing. And this is precisely where its value lies: as an early warning system, a basis for decision-making and an indicator of sustainable success. success.

Those who read and plan all cash flows correctly have a deeper insight and make better decisions.

FAQs

• What types of cash flow are there and what do they stand for?
  The three main types are
  - Operating cash flow: money from day-to-day operations
  - Investment cash flow: cash flows from the purchase or sale of assets
  - Financing cash flow: cash flows from loans, capital or dividends
  This distinction helps to better understand the financial position and strategy of a company.
• Why is cash flow more important than profit?
  While profit can be influenced by accounting factors such as depreciation or provisions, cash flow shows whether a company is actually solvent. A positive cash flow means that there are sufficient funds available to cover running costs, regardless of the profit shown in the balance sheet.
• How are the cash flow types related to each other?
  The three types of cash flow complement each other to form an overall view of the company's cash flow. A positive sum of all cash flows can have different causes, for example due to strong operating business or external financing. Only by looking at them separately does it become clear how sustainable and stable a company's business is.