Cash flow

For other uses, see Cash flow (disambiguation).

A cash flow describes a real or virtual movement of money:

Cash flows are narrowly interconnected with the concepts of value, interest rate and liquidity. A cash flow that shall happen on a future day tN can be transformed into a cash flow of the same value in t0.

Cash flow analysis

Cash flows are often transformed into measures that give information e.g. on a company's value and situation:

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. Subset terms include net cash flow, operating cash flow and free cash flow.

Symptoms of cash flow problems. There are many reasons a business can suffer cash flow problems – some are down to mismanagement and poor decisions, and in some cases factors outside of your control. Any of the following symptoms can indicate that a business is experiencing cash flow problems:

Cash flow problems can be avoided through good credit management; the Chartered Institute of Credit Management has produced a series of Managing Cash flow Guides which are available on its website (see references) which have been dowloaded more than 500,000 times at December 2015

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

  1. Operational cash flows: Cash received or expended as a result of the company's internal business activities.

so how to calculate operating cash flow of a project? OCF=incremental earnings+depreciation=( earning before interest and tax-tax)+depreciation=earning before interest and tax*( 1-tax rate)+ depreciation= ( revenue - cost of good sold- operating expense- depreciation)* (1-tax rate)+depreciation= ( Revenue - cost of good sold- operating expense)* (1-tax rate)+ depreciation* tax. By the way, depreciation*tax 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.

  1. changing in net working capital. It is the cost or revenue related to the company's short-term asset like inventory.
  2. capital spending. 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:

  1. operating cash flow: It 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.
  2. investment cash flow: It refers to the cash flow which related to the company's fix asset such as equipment building and so on such as the cash used to buy a new equipment or a building
  3. 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.


Description Amount ($) totals ($)
Cash flow from operations +70

  Sales (paid in cash) +30
  Incoming loan +50
  Loan repayment -5
  Taxes -5
Cash flow from investments -10
  Purchased capital -10
Total 60

The net cash flow only provides a limited amount of information. Compare, for instance, 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 +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.

See also


    Further reading

    External links

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