Cash flow is the money that actually moves into and out of your bank account in a period. It is split into three parts: operating, investing and financing. Cash flow differs from profit because invoices, stock purchases and loan repayments hit your account at different times than they hit your profit statement.
Operating cash flow is money from customers minus money paid to suppliers, staff and the tax office. Investing cash flow covers buying and selling assets, such as a machine or a vehicle. Financing cash flow covers loans taken up or repaid and equity paid in or distributed.
Worked example. In April you invoice 50,000 euros, but two customers with 18,000 euros of invoices pay in May, so 32,000 euros arrives. You pay 28,000 euros in salaries and supplier bills and 12,000 euros for a used machine. Operating cash flow is 4,000 euros, investing cash flow is minus 12,000 euros, and your account drops by 8,000 euros. Your April profit statement can still show a healthy result.
The error that ends many young companies is planning revenue and cost by month while assuming payment happens on the day of the invoice. It rarely does. Build the plan with real payment terms. If you invoice at 30 days and customers pay on average after 45 days, money arrives six weeks after the work is done, and six weeks of salaries have to be funded from somewhere.
A second error is forgetting VAT. You collect VAT with the invoice and pass it on later. That money sits in your account and is not yours. Founders who spend it notice the gap only when the tax payment falls due.
A monthly cash flow plan for the next twelve months, showing the opening and closing bank balance for every month, is the most useful table in a business plan.
