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A cash flow is 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 main functions of money are distinguished as: a ...
: *a cash flow in its narrow sense is a payment (in a currency), especially from one central bank 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 ''t'', nominal amount ''N'', currency ''CCY'' and account ''A''; symbolically ''CF'' = ''CF''(''t,N,CCY,A''). * it is however popular to use ''cash flow'' in a less specified sense describing (symbolic) payments into or out of a business, project, or financial product. Cash flows are narrowly interconnected with the concepts of value, ''interest rate'' and liquidity. A cash flow that shall happen on a future day ''t''N can be transformed into a cash flow of the same value in ''t''0.


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 Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in t ...
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 Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, ...
and
net present value The net present value (NPV) or net present worth (NPW) applies to a series of cash flows occurring at different times. The present value of a cash flow depends on the interval of time between now and the cash flow. It also depends on the discount ra ...
. *to determine problems with a business's
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 qui ...
. 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
profit Profit may refer to: Business and law * Profit (accounting) Profit, in accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic ...
s when it is believed that
accrual accounting Accrual (''accumulation'') of something is, in finance, the adding together of interest or different investments over a period of time. It holds specific meanings in accounting, where it can refer to accounts on a balance sheet that represent liabil ...
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
accrual accounting Accrual (''accumulation'') of something is, in finance, the adding together of interest or different investments over a period of time. It holds specific meanings in accounting, where it can refer to accounts on a balance sheet that represent liabil ...
. When net
income In microeconomics Microeconomics is a branch of mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a bas ...
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: * perating cash flow- 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 (CFF) - the net flows of cash that are used to fund the company. This includes transactions involving dividends, equity, and debt.


Business' financials

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 for a project is the sum of cash flows that are classified in three areas: * Operational cash flows: cash received or expended as a result of the company's internal business activities. Operating cash flow of a project is determined by: **OCF = incremental earnings+depreciation=(earning before interest and tax−tax)+depreciation **OCF = earning before interest and tax*(1−tax rate)+ depreciation **OCF = (revenue − cost of good sold − operating expense − depreciation)* (1−tax rate)+depreciation **OCF = (Revenue − cost of good sold − operating expense)* (1−tax rate)+ depreciation* (tax rate) Depreciation*(tax rate) which locates at the end of the formula is called depreciation shield through which we can see that there is a negative relation between depreciation and cash flow. * Changing in net working capital: it is the cost or revenue related to the company's short-term asset like inventory. *
Capital spending Capital expenditure or capital expense (capex or CAPEX) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered a capital expenditure ...
: this is the cost or gain related to the company's fix asset such as the cash used to buy a new equipment or the cash which is gained from selling an old equipment. The sum of the three component above will be the cash flow for a project. And the cash flow for a company also include three parts: *
Operating cash flowIn financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as bu ...
: refers to the cash received or loss because of the internal activities of a company such as the cash received from sales revenue or the cash paid to the workers. *Investment cash flow: refers to the cash flow which related to the company's fixed assets such as equipment building and so on such as the cash used to buy a new equipment or a building *Financing cash flow: cash flow from a company's financing activities like issuing stock or paying dividends. The sum of the three components above will be the total cash flow of a company.


Examples

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


See also

*
Capital gain Capital gain is an economic concept defined as the profit Profit may refer to: Business and law * Profit (accounting) Profit, in accounting Accounting or Accountancy is the measurement, processing, and communication of financial an ...
*
Cash flow sign convention The cash flow sign convention is that money you pay out has a minus sign The plus and minus signs, and , are mathematical symbols used to represent the notions of positive and negative, respectively. In addition, represents the operation of ...
*
Cash flow hedge {{finance-stub A cash flow hedge is a hedge A hedge or hedgerow is a line of closely spaced shrub A shrub (or bush, but this is more of a gardening term) is a small- to medium-sized perennial woody plant. Unlike herbaceous plants, shr ...
*
Cash flow projection Cash flow forecasting is the process of obtaining an estimate or forecast of a company's future financial position; the cash flow A cash flow is a real or virtual movement of money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray ...
*
Cash flow statement In financial accounting, a cash flow statement, also known as ''statement of cash flows'', is a financial statements, financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the a ...
*
Investment Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance Finance is the study of financial institution ...

Investment
*
Passive income Passive income is income that requires minimal labor to earn and maintain. It is called progressive passive income when the earner expends little effort to grow the income. Examples of passive income include rental income Renting, also kno ...
*
Profit Profit may refer to: Business and law * Profit (accounting) Profit, in accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic ...
*
Return of capital {{Unreferenced, date=February 2007 Return of capital (ROC) refers to principal Principal may refer to: Title or rank * Principal (academia) The principal is the chief executive and the chief academic officer of a university A university ( l ...
*
Return on equity The return on equity (ROE) is a measure of the profitability of a business in relation to the equity Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, eq ...


References


Further reading

* Auerbach, A. J., & Devereux, M. P. (2013).
Consumption and cash-flow taxes in an international setting
' (No. w19579). STICERD - Public Economics Programme Discussion Papers 03, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. National Bureau of Economic Research.


External links


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