Cash flow, in general, refers to payments made into or out of a business, project, or financial product. It can also refer more specifically to a real or virtual movement of

money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are: m ...

. *Cash flow, in its narrow sense, is a

payment A payment is the tender of something of value, such as money or its equivalent, by one party (such as a person or company) to another in exchange for goods or services provided by them, or to fulfill a legal obligation or philanthropy desir ...

(in a

currency A currency is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a ''system of money'' in common use within a specific envi ...

), especially from one

central bank A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...

account to another. The term 'cash flow' is mostly used to describe payments that are expected to happen in the future, are thus uncertain, and therefore need to be forecast with cash flows. *A cash flow is determined by its time , nominal amount , currency , and account ; symbolically, . Cash flows are narrowly interconnected with the concepts of value, interest rate, and

liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quic ...

. A cash flow that shall happen on a future day can be transformed into a cash flow of the same value in . This transformation process is known as

discounting In finance, discounting is a mechanism in which a debtor obtains the right to delay payments to a creditor, for a defined period of time, in exchange for a charge or fee.See "Time Value", "Discount", "Discount Yield", "Compound Interest", "Effici ...

, and it takes into account the

time value of money The time value of money refers to the fact that there is normally a greater benefit to receiving a sum of money now rather than an identical sum later. It may be seen as an implication of the later-developed concept of time preference. The time ...

by adjusting the nominal amount of the cash flow based on the prevailing

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...

s at the time.

Cash flow analysis

Cash flows are often transformed into measures that give information e.g. on a company's value and situation: * to determine a project's

rate of return In finance, return is a profit on an investment. It comprises any change in value of the investment, and/or cash flows (or securities, or other investments) which the investor receives from that investment over a specified time period, such as i ...

or value. The time of cash flows into and out of projects are used as inputs in financial models such as

internal rate of return Internal rate of return (IRR) is a method of calculating an investment's rate of return. The term ''internal'' refers to the fact that the calculation excludes external factors, such as the risk-free rate, inflation, the cost of capital, or fin ...

and

net present value The net present value (NPV) or net present worth (NPW) is a way of measuring the value of an asset that has cashflow by adding up the present value of all the future cash flows that asset will generate. The present value of a cash flow depends on ...

. * to determine problems with a business's

. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash even while profitable. * as an alternative measure of a business's profits when it is believed that

accrual accounting In accounting and finance, an accrual is an asset or liability that represents revenue or expenses that are receivable or payable but which have not yet been paid. In accrual accounting, the term accrued revenue refers to income that is recogni ...

concepts do not represent economic realities. For instance, a company may be notionally profitable but generating little operational cash (as may be the case for a company that barters its products rather than selling for cash). In such a case, the company may be deriving additional operating cash by issuing shares or raising additional debt finance. * cash flow can be used to evaluate the 'quality' of income generated by

. When net

income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. F ...

is composed of large non-cash items it is considered low quality. * to evaluate the risks within a financial product, e.g., matching cash requirements, evaluating default risk, re-investment requirements, etc. Cash flow notion is based loosely on cash flow statement accounting standards. The term is flexible and can refer to time intervals spanning over past-future. It can refer to the total of all flows involved or a subset of those flows. Within cash flow analysis, 3 types of cash flow are present and used for the cash flow statement: * Cash flow from operating activities - a measure of the cash generated by a company's regular business operations. Operating cash flow indicates whether a company can produce sufficient cash flow to cover current expenses and pay debts. * Cash flow from investing activities - the amount of cash generated from investing activities such as purchasing physical assets, investments in securities, or the sale of securities or assets. * Cash flow from financing activities - the net flows of cash that are used to fund the company. This includes transactions involving dividends, equity, and debt. In public finance and development economics, effective cash flow planning is also central to fiscal control, liquidity risk mitigation, and debt management.

Business' financials

Cash flow is a critical indicator of a company's financial health, representing the net amount of cash and cash equivalents moving into and out of a business. The total net cash flow over a period (typically a quarter, half-year, or full year) equals the change in the cash balance during that period: positive if the cash balance increases, negative if it decreases. Net cash flow is calculated by subtracting total cash outflows from total cash inflows. The total net cash flow for a project comprises three main components: * Operating cash flow (OCF): Cash generated from a company's core business operations. OCF can be calculated using various formulas, such as: ** OCF = EBIT × (1 − Tax Rate) + Depreciation ** OCF = Net Income + Depreciation & Amortization + Changes in Working Capital Depreciation provides a tax shield, reducing taxable income and thus increasing cash flow. * Change in net working capital (NWC): The difference between current assets and current liabilities. An increase in NWC indicates that a company is using cash to fund assets like inventory, while a decrease suggests that the company is freeing up cash. * Capital expenditures (CapEx): Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings, or equipment. These are considered investments in the business's future operations. The sum of these components determines the project's cash flow. Similarly, a company's cash flow statement is divided into three sections: * Operating activities: Cash flows from the primary revenue-generating activities, including receipts from sales of goods and services and payments to suppliers and employees. * Investing activities: Cash flows related to the acquisition and disposal of long-term assets and investments, such as purchasing equipment or selling securities. * Financing activities: Cash flows resulting from transactions with the company's owners and creditors, including issuing shares, borrowing, and repaying debts. The aggregate of these three sections provides the total cash flow of the company.

Examples

The net cash flow provides insight into a company's liquidity but may not fully represent its financial health. For instance, consider the cash flows over three years of two companies: While Company B shows higher net cash flow, Company A is generating more cash from its core operations and is investing significantly in long-term assets, which may yield returns in the future.

References

External links

A Review of Academic Research on the Reporting of Cash Flows from OperationsExample of Cash flow Calculator
{{DEFAULTSORT:Cash Flow Accounting terminology Corporate finance Fundamental analysis

Cash flow analysis

Business' financials

Examples

See also

References

Further reading

External links