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Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, limited period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation. Cash flow can be used, for example, for calculating parameters: it discloses cash movements over the period.
Cash flow notion is based loosely on cash flow statement accounting standards. It's flexible as it 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. Subset terms include net cash flow, operating cash flow and free cash flow.
The (total) net cash flow of a company over a period (typically a quarter, half year, or a full year) is equal to the change in cash balance over this period: positive if the cash balance increases (more cash becomes available), negative if the cash balance decreases. The total net cash flow is the sum of cash flows that are classified in three areas:
|Description||Amount ($)||totals ($)|
|Cash flow from operations||+10|
|Sales (paid in cash)||+30|
|Cash flow from financing||+40|
|Cash flow from investments||-10|
The net cash flow only provides a limited amount of information. Compare, for example, the cash flows over three years of two companies:
|Company A||Company B|
|Year 1||Year 2||year 3||Year 1||Year 2||year 3|
|Cash flow from operations||+20M||+21M||+22M||+10M||+11M||+12M|
|Cash flow from financing||+5M||+5M||+5M||+5M||+5M||+5M|
|Cash flow from investment||-15M||-15M||-15M||0M||0M||0M|
|Net cash flow||+9M||+10M||+11M||+13M||+14M||+15M|
Company B has a higher yearly cash flow. However, Company A is actually earning more cash by its core activities and has already spent 45M in long term investments, of which the revenues will only show up after three years.