Cash flow definition

the amount of money being transferred in and out of a business for a given period


What does cash flow mean?

Cash flow represents the sums of money flowing into or out of a business. Adequate cash flow management is essential for any business since it has a direct impact on its operating activities. If a company has inadequate cash flow, it could mean that the business cannot conduct its operations and provide value for its owners. A higher level of cash outflow would mean that the company is spending more cash than receiving, which is referred to as a negative cash flow.

Positive cash flow would mean that the company has a higher level of cash inflow compared to the cash outflow. Positive cash flow increases the value for shareholders and raises cash reserves. A higher level of reserves could be used for different activities in the future (dividends payout, financing new investments, improving liquidity, etc.).

Difference between cash flow and income

The income reported on an income statement is calculated by taking into account the entire revenue from cash sales and sales to be paid in the future date minus the costs and expenses. On the other hand, a cash flow statement records only sales for which the cash is transferred (flown) into the business. For instance, a company has recorded total sales of $50,000, out of which $20,000 has been paid in cash, while the remaining sales are to be paid in 30 days. The cash flow statement will only record the $20,000 the company has received in cash. The outstanding $30,000 will be recorded as cash inflow after 30 days, at which point it should have been paid by the customers.

Types of cash flow

There are three basic types of cash flow:

Investing cash flow takes into account cash which has been earned through the company’s investment activities. Investing activities are comprised of buying and selling long term assets such as plant, non-trading securities, property, etc. Cash inflow is recorded when an asset is sold, and cash outflow is recorded when an asset is bought.

Operating cash flow is cash generated from the company’s main operating activities. The operating activities are the company’s daily core activities. Operating cash flow records all cash inflows originating from sales, and all cash outflows used to pay suppliers and other obligations.

Financing cash flow is dealing with cash inflows and outflows used to finance the company. Financing activities are comprised of equity issuance, debt issuance, dividends payout, and other stocks and bonds related transactions.

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