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Cash Flow

Cash Flow

What Is Cash Flow?

The name says everything: Cash flow refers to the movement of cash into and out of a company. Inflows refer to the money that is going into a business, while outflows describe the money leaving a business. When inflows exceed outflows, a business is considered healthy.
Cash flow, along with other quantitative metrics like debt-to-equity and P/E ratios, make up an important part of fundamental analysis, which is a process investors use to value companies. Positive cash flow means that a company's liquidity โ€” which measures how easily a company's assets can be converted to cash โ€” is developing. Liquidity is an integral component of a company's cash flow because it is the sum of the tangible assets that a company needs to run its operations, pay its wages and debts, etc.

Cash Flow Example

Let's say you own a shoe store. Your assets would include items like your shoes and the building your store is located in. Your total revenues (i.e., your cash inflows) would be your shoe sales. Your outflows would be what you pay your employees, your operating expenses (like inventories, rent, and utilities), and what you owe your creditors.

What Are the Three Types of Cash Flows?

There are three types of cash flow for a business:

  1. Operational Cash Flow (OCF) measures the short-term financial health of a business. It's the total amount of cash that a business produces from daily operations. You can calculate this by utilizing net income, which is cash inflows from accounts receivable subtracted from expenses from accounts payable.
  2. Cash Flow From Financing Activities (CFF) measures the cash flow between a company and its owners or creditors โ€” people who provide long-term funds to a business. These items include the repayment of debt or loans, the sale of stocks or stock repurchases, bond issuance, and dividend payments.
  3. Cash Flow From Investing Activities (CFI) is the total of a company's long-term investment gains or losses plus the purchase or sale of fixed assets. These can include a company vehicle, equipment, a building, etc. Cash flow from investing activities is calculated by simply adding up money received from the sales of securities and long-term assets subtracted from the cost of purchasing the assets.

Will Cash Flow Be Negative?

Yes. Assuming that a company has a negative cash flow, that means it can't cover its liabilities, thus it must borrow against the value of its assets to meet its expenses. Startups are one type of company where negative cash flow is considered acceptable. Mature companies may likewise experience negative cash flow when they make dividend payments or stock repurchases.
Yet, left unchecked, negative cash flow can tear apart the very fabric of a business. For example, when negative cash flow results in a company's failure to make payments on a loan, that makes the company less attractive for future capital investment. What's more, its stock is considered to have higher interest rate risk.
When a business is running low on cash, it could experience a cash crunch, which affects daily operations. To overcome this, the business would need to secure emergency financing or raise cash, perhaps by inquiring as to whether they can pay up front instead of on credit. Assuming that insolvency persists, the business might need to lay off workers. Assuming the worst, the company could even need to declare bankruptcy, and that means it must cease operations, leave business, and sell off its assets to pay its debts.
It's dependably advisable for a business to pay close attention to its cash flow as well as hold a percentage of its assets in reserves โ€” in case the unthinkable ever happens.

Are Cash Flow and Profit the Same?

Cash flow and profit are not the same concepts. Profit's left over after expenses, while cash flow is the net flow of cash into and out of a business. Some say that cash flow is even more important than profit because positive cash flow gives a business more opportunities to develop. Here, the maxim "cash is top dog" is apt โ€” the more cash a business has, the more liquid it is, and the easier it will be to secure financing, draw in investors, etc.

How Could Investors Interpret a Cash Flow Statement?

Knowing how to read a cash flow statement can help an investor understand the financial health of a company, and in this way whether or not they ought to invest in it. Cash flow statements illustrate which stage of the business cycle a company is in, be it a youthful and developing beginning up or a more mature and profitable enterprise. It can likewise shed light on whether a company is facing financial difficulties or in a state of decline.

Cash Flow Statement FAQs

We've put together the stray pieces about cash flow statements.

What Is a Cash Flow Statement?

Lenders, investors, and shareholders all gander at a company's financial documents to gauge its health. These documents include the balance sheet, which illustrates the company's assets, the income statement, which tells you how profitable the business is over some random period, and the cash flow statement. Some say the cash flow statement serves like a bridge between the balance sheet and income statement since it describes how cash is moving during a specific timeframe. Accordingly, the cash flow statement tells us how the business has raised and spent its cash.

How Is a Cash Flow Statement Created?

Accountants create a cash flow statement by deducting the non-cash items from the income statement.

What Is a Cash Flow Forecast?

Cash flow forecasts, likewise prepared by the accounting team, can help companies gauge future expectations of profit and misfortune โ€” especially when there is a lag between paying for a product and receiving income from a customer. This timeframe is known as the cash flow gap.

Personal Cash Flow Calculator

We've discussed ways that analysts and accountants calculate a company's cash flow; how is cash flow measured in individual terms? The Financial Industry Regulatory Authority (FINRA), a non-governmental agency authorized by the U.S. government to oversee brokers, has created a cash flow calculator that can help individuals control their spending. It's available on the FINRA website. By inputting your salary and expenses, it can help you calculate your month to month net income and determine whether your cash flow will be positive or negative.


  • Cash received signifies inflows, and cash spent signifies outflows.
  • The cash flow statement is a financial statement that reports on a company's sources and usage of cash over some time.
  • There are several methods used to analyze a company's cash flow, including the debt service coverage ratio, free cash flow, and unlevered cash flow.
  • Cash flow is the movement of money all through a company.
  • A company's cash flow is typically categorized as cash flows from operations, investing, and financing.


Do Companies Need to Report a Cash Flow Statement?

The cash flow statement complements the balance sheet and income statement and is a mandatory part of a public company's financial reporting requirements since 1987.

What Are the Three Categories of Cash Flows?

The three types of cash flows are operating cash flows, cash flows from investments, and cash flows from financing.Operating cash flows are generated from the normal operations of a business, incorporating money taken in from sales and money spent on cost of goods sold (COGS), along with other operational expenses, for example, overhead and salaries.Cash flows from investments include money spent on purchasing securities to be held as investments like stocks or bonds in other companies or in Treasuries. Inflows are generated by interest and dividends paid on these holdings.Cash flows from financing are the costs of raising capital, for example, shares or bonds that a company issues or any loans it takes out.

Why Is the Price-to-Cash Flows Ratio Used?

The price-to-cash flow (P/CF) ratio is a stock multiple that measures the value of a stock's price relative to its operating cash flow per share. This ratio uses operating cash flow, which adds back non-cash expenses, for example, depreciation and amortization to net income.P/CF is especially useful for esteeming stocks that have positive cash flow however are not profitable because of large non-cash charges.

How Are Cash Flows Different Than Revenues?

Revenues refer to the income earned from selling goods and services. On the off chance that an item is sold on credit or through a subscription payment plan, money may not yet be received from those sales and are booked as accounts receivable. Be that as it may, these don't represent genuine cash flows into the company at that point. Cash flows track outflows as well as inflows and categorize them with regard to the source or use.

What Is Free Cash Flow and Why Is It Important?

Free cash flow is the cash left over after a company pays for its operating expenses and CapEx. The money remains after paying for items like payroll, rent, and taxes. Companies are free to use FCF as they please.Knowing how to calculate FCF and analyze it helps a company with its cash management and will provide investors with understanding into a company's financials, helping them make better investment decisions.FCF is an important measurement since it shows how efficient a company is at generating cash.