A study has shown that only 20% of startup companies survive the first five years in business.

Let's look at this scenario.

Company A and Company B are both phone manufacturers.

The two companies started operation the same year.

Also, both companies made an annual turnover of $10 million in their first year of business.

Five years down the line, Company A goes bankrupt and goes out of existence, while Company B has grown to generate an annual turnover running into hundreds of millions of dollars.

What happened?

What made the difference between these two companies?

You will find the answer in the cash flow statement of both companies.

In simple terms, cash flow refers to the movement of cash in or out of a business or an establishment.

It is the total money that comes into a business and the total money that goes out of a business.

When we talk about money here, it does not imply cash only.

It also refers to cash equivalents.

For instance, things like office buildings, machinery, warehouses, plants, trucks, etc. that come into a company are not cash, but they are cash equivalent.

At the basic level, if a company can generate profit for the shareholders and has built a structure that guarantees positive returns for many years ahead, it means that the company's cash flow is in a healthy state.

On the other hand, if the company is struggling to pay out dividends to its shareholders and is accumulating more debt than profits, it means that the company's cash flow is in an unhealthy state.

Let's look at it from another angle.

Let's pretend you own a company that manufactures furniture.

You make money from the sale of furniture.

You need the cash flow to pay your workers, your suppliers, and yourself.

You also pay out your business loans.

From the money you make, you pay for your house, your car, and other personal expenses.

As long as the cash that comes to you is enough to take care of these obligations, then your cash flow is in a healthy state.

We can break down cash flow into two types.

Positive Cash Flow When a company has a positive cash flow, it shows that the company is adding to its cash reserves.

That is to say, this company is making more money than it is spending.

This kind of result could allow the company to reinvest in the company, pay out money to the shareholders, and also be able to handle payments of debt in the future.

Let's say a company's total revenue for the year is $100 million, but its total spending is $60 million.

That means this company has $40 million in excess.

It is from this $40 million that money will be paid out to the shareholders in the form of dividends.

A part of the profit could also go into acquiring equipment and other forms of investments that could sustain the long-term growth and earnings of the company.

Negative Cash Flow When a company is spending more money than it is generating, then this company is running on a negative cash flow.

One company could be generating more money than another company in the same business, but still be on a negative cash flow, while the other company is on a positive cash flow.

Let's call this company Diamond Brand.

If Diamond Brand has generated $200 million in revenue or inflow of cash for the year, but its total spending or outflow of cash is $220 million, then it has accumulated $20 million in losses.

In this case, the company is on a negative cash flow.

Let's introduce the other company that's in the same business as Diamond Brand.

Let's call this second company Emerald.

If Emerald had net revenue of $150 million, but its total spending is $100 million, that means this second company has made $50 million in positive cash flow.

In this scenario, even though Diamond Brand generated more sales and accumulated more revenue, Emerald is far ahead in profit and is more sustainable.

At this rate, Diamond Brand is most likely to pack up in a few years to come, while Emerald could be on its way to becoming the next big thing.

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The Cash Flow Statement The Cash Flow Statement, CFS, is a financial statement that places side by side the total money that comes into a company versus the cash that goes out of the company.

The money that comes in or goes out could be cash or cash equivalent.

The Cash Flow Statement assesses how a company handles its cash situation.

It shows how the company generates money to meet its financial obligations.

It is a mandatory part of a company's financial reports.

Here are different forms of cash flow.

Operational Cash Flow This includes all the money that comes from a company's major business engagements.

Like in the example given earlier, you own a company that manufactures furniture.

All the cash that comes from the entire process of manufacturing and distribution of furniture falls under this category.

This incoming cash is what pays salary to your workers, yourself, and takes care of other operational costs.

From the money your workers earn, they take care of their financial obligations while you handle your personal financial needs from the money you earn.

Investment Cash Flow This refers to cash made or spent through investing activities made by a company.

This includes investments made by a company into other business establishments such as purchases of capital assets, such as plants or equipment.

This kind of investment is made majorly for expansion of the company.

Shareholders could earn more money in dividends, and the overall value of the company will go up.

In your case, as an example, when you make this kind of investment in your furniture company, it could increase your net worth.

Financing Cash Flow This includes cash a company receives through other establishments, or paid out as debt repayment to other establishments.

All the money a company receives or spends when it issues bonds, sells stocks, or pays debts accruing from loans falls under financing cash flow.

If a business comes short on cash and is unable to pay its obligations, it will experience a cash flow crunch.

If the cash flow crunch stays for a long time, that business could run into bankruptcy.

And this is not good for any establishment.

For this reason, it is advisable to set up a form of an emergency fund.

It means that in good times, you keep aside some money that could help you manage future emergencies.

This is a good idea when it comes to managing cash either for yourself or for your business.

Free Cash Flow This is not part of the three major kinds of cash flows in formal terms, but it is highly valued by investors.

This is money that comes out when a company's capital spending is subtracted from the operational cash flow.

It is called free cash flow because it is free from any commitment.

It is very important because it shows the money that a company has after spending cash on its obligations.

It is a measure that is often used by business analysts to assess how profitable a company is.

Robert Kiyosaki Explains Cash Flow Robert Kiyosaki, the author of the best-selling book Rich Dad Poor Dad, explained cash flow in what he calls the cash flow quadrant.

According to Kiyosaki, there are four categories of people. 1.

Employees 2.

Small Business Owners, Self-Employed or Specialists 3.

Big Business Owners 4.

Investors Robert said that growing up, he wanted to be rich.

But his poor dad, who was his real dad, wanted him to be an employee and often told him, go to school, graduate with good grades, come out and get a good job.

That falls under the first category, employees.

On the other hand, his mother wanted him to become a medical doctor.

He said his mother, who was a registered nurse, told him, the richest people I know are medical doctors.

In other words, his mother wanted him to be a specialist.

This falls under the second category, specialists.

According to Robert, the person who made the greatest impact in his life was his rich dad.

Robert's rich dad was not his real dad, but the father to his childhood friend.

Robert's rich dad wanted him to become a big business owner and then an investor.

He said to him, Robert, if you want to be rich, you have to build businesses and become an investor.

In other words, the third and the fourth categories are where wealth is built.

A big business owner is someone that builds a business that has up to 500 people as employees.

An investor is someone who has transitioned from owning businesses to investing in other businesses.

Investors do not have to be a part of the day-to-day affairs of the company they invested in, but they are making their money from those companies.

Examples of big business owners are Mark Zuckerberg, Elon Musk, Bill Gates, Michael Dell, etc.

People in this category pay the lowest form of taxes legally and therefore have a cash flow that is not unhindered.

They also have a better opportunity to grow their money even more.

People who work in the first and second categories pay the highest amounts in taxes and could end up struggling financially in the future if their responsibilities increase.

So, to build wealth, you have to work on transitioning from employee-slash-specialist to big business owner and investor.

There's nothing wrong with being an employee or a specialist, most times it's a good place to start from, but you would want to aim for the best in life.

You could do this by saving money from your earnings in the first and second categories so that you could invest in things that would bring you money and passive income.

To further explain this, Robert defined the terms assets and liabilities.

For a long time, most people counted their cars and their homes as assets, but Robert has a different view.

In simple terms, Kiyosaki defined an asset as anything you own that brings you money while a liability is anything that takes money away from you.

That is to say, an asset makes you richer whereas a liability makes you poorer.

Let's say you own a home and a car.

At the end of each month, you pay a mortgage for your home and a loan for your car.

These possessions are taking money from you and therefore are draining your cash flow.

If you want to build a positive cash flow, then you must focus on putting your money on things that will bring money to you without you having to do extra work.

Robert suggests investing in real estate or any other form of investment that could put cash in your pocket after deducting the expenses.

Let's say you bought an apartment building at the cost of a million dollars with no money down on your part.

This property is being financed by your bank and is bringing in $15,000 in monthly revenue.

If your monthly expenses on this property are $12,000 which you spend as payback for loans and taxes, you will be left with $3,000 in positive cash flow every month.

This is the money you are earning in passive income.

You do not have to do any extra work to earn this money.

So, Robert suggests keeping your liabilities low while you work on growing your assets.

Assets bring positive cash flow.

It's the positive cash flow that comes to you as passive income that could make you financially free and help you build wealth.

Here are some videos you could watch.

Assets vs Liabilities and How to Generate Assets.

Everything you need to know about buying a car.

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