Cash flow literally means the flow of money. It refers to how much money actually comes into and goes out of your business over a given period, and what is left at the end. It is about real money in the account, not figures that only exist on paper.
This is the key difference from profit. Profit appears in your accounts and includes items that involve no movement of money at all. Take depreciation on a delivery van you paid for years ago. That expense reduces your profit but costs you nothing today. Conversely, you can report a profit and still be short of cash because customers have not yet paid.
Cash flow is therefore calculated differently. You take the profit and add back the non-cash costs such as depreciation. This shows how much money your business genuinely generates from ongoing operations. This is called operating cash flow, one of the central figures for the liquidity of your business.
Free cash flow is different again. It is the money left over after necessary investments, such as a new machine or a vehicle. It is this free cash flow that you can use to repay a loan or pay yourself.
Cash flow also differs from EBITDA. EBITDA is earnings before interest, taxes and depreciation and is used mainly to compare businesses. Cash flow, by contrast, also accounts for taxes and payment behaviour and tells you what actually lands in the account at the end of the month. For a company's profitability it is often more revealing than any other figure.
For business sellers
For you as the owner, cash flow is often more meaningful than profit alone. If you want to hand over your business, a serious buyer will look closely at how stable and predictable your cash flow has been over recent years. A steady, healthy cash flow is a strong selling point: it shows the business works under its own steam. Under the capitalised earnings method, it is precisely this return that feeds into the valuation.
So prepare the last three years cleanly and clearly separate one-off special effects. If, for example, you pay yourself a low wage or run private costs through the business, be open about it. That lets the buyer understand the real cash flow. And you avoid your sale price being pushed down because the figures look unclear.
For corporate buyers
When you buy a business, cash flow is your most important figure, more important than profit. A bank will only finance your purchase if the business generates enough money to service the loan and its interest. This is called debt service. Put concretely: after all ongoing expenses, is there enough left to pay the monthly instalment each month and still live off your income? With acquisition financing, that is the question that decides whether you get the yes.
So calculate conservatively. Check whether the cash flow still holds if revenue dips or an investment is due. A business with stable, transparent cash flow gives you planning security. It is often the more solid path than starting from scratch, where you first have to get by for years without reliable cash flow.
Example
Take a small joinery. It reports an annual profit of 60,000 euros. This profit includes 25,000 euros of depreciation on machines and the delivery van, costs that involved no money, because the purchases were paid for long ago. Operating cash flow is therefore 60,000 + 25,000 = 85,000 euros. Now the business must invest around 15,000 euros a year in replacement machines to keep working. That leaves a free cash flow of 70,000 euros. From these 70,000 euros a buyer can service the purchase loan and pay themselves a wage, even though the profit on paper was only 60,000 euros.
FAQ
Is cash flow the same as profit?
No. Profit is a calculated figure from your accounts and also includes items with no movement of money, such as depreciation. Cash flow shows the real money that is left. A business can make a profit and still be short of cash.
What is the difference between operating and free cash flow?
Operating cash flow is the money from ongoing operations. Free cash flow is what remains after you deduct necessary investments. With free cash flow you repay loans or pay yourself.
Why is cash flow decisive when buying, why buy instead of starting up?
Because you repay the purchase loan from the business's cash flow. An existing business gives you a reliable flow of money from day one, which the bank counts on. With a start-up you first have to build this cash flow over years, at far higher risk.
How does cash flow differ from EBITDA?
EBITDA is earnings before interest, taxes and depreciation and is used to compare businesses. Cash flow goes further: it also accounts for taxes and payment behaviour and shows what actually lands in the account.
How do I recognise a healthy cash flow?
A healthy cash flow is stable over several years, not dependent on single large orders, and comfortably covers investments and any debt service. Ask to see the last three years and watch for one-off special effects.
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