Cash Flow Basics: What it is and How it Works
If your runway looks solid on paper but your gut says something’s off, you’re probably dealing with a cash flow problem.
Cash flow is one of the most basic (and most misunderstood) pieces of financial management—and when it goes sideways, so does your business. In this guide, we’re breaking it down: what cash flow is, how it actually works, and how to use it to stay alive, grow smart, and stop making decisions in the dark.
What Is Cash Flow?
Cash flow is the movement of money in and out of your business. That’s it. Cash coming in is inflow (sales, payments, funding), and cash going out is outflow (rent, payroll, vendors, software, tacos for the team).
When more cash comes in than goes out, that’s positive cash flow. When it’s the other way around, you’re running negative—which means you're either dipping into reserves or racing toward a cash crunch.
Here’s the simple formula:
Net Cash Flow = Total Cash Inflow – Total Cash Outflow
Yes, it really is that simple. But most founders don’t realize they’re operating with blind spots until it’s too late.
Why Cash Flow Isn’t the Same as Revenue or Profit
Let’s kill this confusion once and for all.
Revenue is the money you earned.
Profit is what’s left over after expenses.
Cash flow is the actual movement of money.
You can be profitable and still go broke if your cash flow timing is off. You can also be losing money and still survive for a while—if your cash position is solid.
The takeaway? Cash is king because cash pays the bills. Revenue and profit are lagging indicators. Cash flow is right now.
The 3 Types of Cash Flow (And Why They Matter)
Cash flow isn’t just one thing. It breaks down into three categories on your cash flow statement—one of the core financial statements alongside the balance sheet and income statement.
1. Cash Flow from Operations (CFO)
This is what you generate (or lose) from your core business activities—selling your product, paying your team, keeping the lights on. If your CFO is negative for too long, your business is in trouble.
2. Cash Flow from Investing (CFI)
This shows what you’re spending on long-term assets (equipment, software, R&D) or what you're bringing in from selling them. Negative CFI isn’t always bad—it could mean you’re investing in future growth.
3. Cash Flow from Financing (CFF)
This is money in or out from funding activities—raising capital, paying dividends, or repaying loans. If you're fundraising or paying down debt, you'll see the action here.
How to Analyze Your Cash Flow Without Overcomplicating It
You don’t need to be a CFO to read a cash flow statement. You just need to know what to look for:
Is your operating cash flow consistently positive?
Are you funding growth from revenue or from financing?
Are you spending more than you’re bringing in—and if so, for how long?
Do your cash flow trends match your growth strategy?
And if you want to go deeper:
Free Cash Flow (FCF): What’s left after expenses and investments
Cash Flow-to-Net Income Ratio: Are your earnings real or just paper?
Current Liability Coverage: Can you pay your bills on time?
Quick Example: The Startup With $0 in the Bank (and $1M in Revenue)
Let’s say you made $1 million in revenue this year. On paper, things look great. But if your customers pay on 90-day terms and you spent $800K in the last two months on salaries, marketing, and new gear?
Guess what: you’re out of cash. Fast.
That’s why founders need more than a P&L. You need a cash flow lens on every decision—so you know if you can actually afford that new hire or expansion push, not just hope the numbers work out.
How to Improve Cash Flow Without Cutting Everything
Good cash flow doesn’t mean austerity. It means clarity. Here’s where to start:
Tighten payment cycles: Incentivize customers to pay faster
Delay big expenses when possible
Forecast weekly—not just monthly or quarterly
Use a real-time dashboard (not just a spreadsheet)
Outsource cash flow reporting if it’s not your strength
This is where smart accounting, budgeting, and systems all work together to support your next move—not block it.
Bottom Line: Cash Flow Isn’t Optional—It’s Survival
If you don’t know how money’s moving through your business, you’re guessing. And guessing doesn’t scale.
Want to get a grip on your cash flow and build a system that helps you sleep at night?
Book a strategy call with an Ursa expert. We’ll help you get clear, get calm, and grow with confidence.