Types of cash flow – 3 types

types of cash flow

Understanding the Three Types of Cash Flow in Small Businesses

Cash flow is the lifeblood of any business, and it’s especially important for small businesses who don’t have access to the same financial resources as larger companies. For a small business to be successful, it needs to understand the three types of cash flow available. These are operating activities, investing activities, and financing activities. Let’s take a look at each one in more detail.

Operating Activities

Operating activities refer to cash flows that come from everyday operations such as sales or expenses related to running the business day-to-day. This includes income from selling goods or services, payment for wages or salaries, and payments for taxes or utilities. It also covers outflows such as payments for suppliers or incentives for employees. Monitoring these types of cash flows is essential because they provide the most accurate picture of a company’s financial health.

Investing Activities

Investing activities are those which involve investing in assets such as land, equipment, plants, and buildings that can help increase profits over time. Investing activities also include buying shares in other companies or selling them off if necessary. This type of activity usually requires significant capital investment up front but has long-term benefits such as increased profits and increased capital value over time.

Financing Activities

Financing activities involve taking out loans either from banks or investors to finance growth initiatives like expanding into new markets or launching new products. They can also involve issuing stock options to raise money from investors or funding expansions with additional debt obligations from banks and other lenders. It's important for small businesses to monitor their financing activity closely so that they don't become overextended with debt obligations which can put them at risk financially if not managed properly.

Overall, understanding the three types of cash flow—operating activities, investing activities, and financing activities—is essential for small businesses who want to remain profitable and stay afloat during difficult economic times. By monitoring these three types of cash flow closely, small business owners can make sure they are making wise investments and staying on top of their debts so that their company remains healthy financially in the long-term.  Knowing how your cash flows work can help you make smart decisions about how you use your resources so that you can succeed in today's challenging economy!

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About the Author

Annette Ferguson 

Owner of Annette & Co. - Chartered Accountants & Certified Profit First Professionals. Helping online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.