Cash flow

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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.

Business' financials[edit]

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:

  1. Operational cash flows: Cash received or expended as a result of the company's internal business activities. It includes cash earnings plus changes to working capital. Over the medium term this must be net positive if the company is to remain solvent.
  2. Investment cash flows: Cash received from the sale of long-life assets, or spent on capital expenditure (investments, acquisitions and long-life assets).
  3. Financing cash flows: Cash received from the issue of debt and equity, or paid out as dividends, share repurchases or debt repayments.

Examples[edit]

DescriptionAmount ($)totals ($)
Cash flow from operations+10
  Sales (paid in cash)+30
  Materials-10
  Labor-10
Cash flow from financing+40
  Incoming loan+50
  Loan repayment-5
  Taxes-5
Cash flow from investments-10
  Purchased capital-10
Total+40

The net cash flow only provides a limited amount of information. Compare, for example, the cash flows over three years of two companies:

Company ACompany B
Year 1Year 2year 3Year 1Year 2year 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-15M0M0M0M
Net cash flow+10M+11M+12M+15M+16M+17M

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.

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