Editing Cash flow

{{Short description|Movement of money into or out of a business, project, or financial product}}
{{Other uses}}
{{accounting}}
'''Cash flow''', in general, refers to payments made into or out of a business, project, or financial product.<ref>{{Cite book |last1=Koller |first1=Tim |title=Valuation: measuring and managing the value of companies |last2=Goedhart |first2=Marc |last3=Wessels |first3=David |date=2015 |publisher=Wiley |others=McKinsey & Company |isbn=978-1-118-87370-0 |edition=Sixth University |location=Hoboken, NJ}}</ref> It can also refer more specifically to a real or virtual movement of [[cash|money]].
*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 [[Cash flow forecasting|forecast]] with cash flows.
*A cash flow {{math|(CF)}} is determined by its time {{mvar|t}}, [[Real versus nominal value (economics)|nominal amount]] {{mvar|N}}, currency {{math|CCY}}, and account {{math|A}}; symbolically, {{math|1=CF = CF(''t'', ''N'', CCY, A)}}.

Cash flows are narrowly interconnected with the concepts of [[Value (economics)|value]], interest rate, and [[liquidity]]. A cash flow that shall happen on a future day {{mvar|t<sub>N</sub>}} can be transformed into a cash flow of the same value in {{math|''t''<sub>0</sub>}}. This transformation process is known as [[discounting]], and it takes into account the [[time value of money]] by adjusting the nominal amount of the cash flow based on the prevailing [[interest rate]]s at the time.

==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 [[Accounting rate of return|rate of return]] 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]] and [[net present value]].<ref>{{cite web | title = What Is the Difference Between NPV and IRR? | url = https://www.investopedia.com/ask/answers/05/npv-irr.asp | website = Investopedia | date = 30 November 2003 | access-date = 30 May 2025}}</ref>

* to determine problems with a business's [[Accounting liquidity|liquidity]]. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash even while profitable.<ref>{{cite web | title = Liquidity Crisis | url = https://www.investopedia.com/terms/l/liquidity-crisis.asp | website = Investopedia | access-date = 30 May 2025}}</ref>

* as an alternative measure of a business's [[profit (accounting)|profits]] when it is believed that [[accrual accounting]] 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.<ref>{{cite web | title = The Accruals-Cash Flow Relation and the Evaluation of Accrual Accounting | url = https://business.columbia.edu/sites/default/files-efs/imce-uploads/CEASA/Events%20Page/accruals-cash_flow_relation.pdf | website = Columbia Business School | access-date = 30 May 2025}}</ref>

* cash flow can be used to evaluate the 'quality' of income generated by [[accrual accounting]]. When net [[income]] is composed of large non-cash items it is considered low quality.<ref>{{cite web | title = Understanding the Cash Flow Statement | url = https://www.abc-amega.com/articles/understanding-the-cash-flow-statement/ | website = ABC-Amega | access-date = 30 May 2025}}</ref>

* to evaluate the risks within a financial product, e.g., matching cash requirements, evaluating default risk, re-investment requirements, etc.<ref>{{cite web | title = The Final Phase of LDI: Cash Flow Matching | url = https://www.westernasset.com/us/en/research/blog/the-final-phase-of-ldi-cash-flow-matching-2023-02-23.cfm | website = Western Asset Management | date = 23 February 2023 | access-date = 30 May 2025}}</ref>

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.<ref>{{cite web | title = IAS 7 — Statement of Cash Flows | url = https://www.ifrs.org/issued-standards/list-of-standards/ias-7-statement-of-cash-flows/ | website = IFRS Foundation | access-date = 30 May 2025}}</ref>

Within cash flow analysis, 3 types of cash flow are present and used for the cash flow statement: 
* Cash flow from operating activities - 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 - the net flows of cash that are used to fund the company. This includes transactions involving dividends, equity, and debt.<ref>{{cite web | title = Managing Government Cash | url = https://www.oecd.org/en/publications/managing-government-cash_7675eb58-en.html | website = OECD | access-date = 30 May 2025}}</ref>

In public finance and development economics, effective cash flow planning is also central to fiscal control, liquidity risk mitigation, and debt management.<ref>{{cite web | title = Cash Management – How Do Countries Perform Sound Practices? | url = https://documents1.worldbank.org/curated/en/403731603139041759/pdf/Cash-Management-How-do-Countries-Perform-Sound-Practices.pdf | website = World Bank | access-date = 30 May 2025}}</ref>

==Business' financials==
{{Citation needed section|date=January 2024}}
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:

* [[Operating cash flow|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]]: 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 flow]]: 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==
{| class=wikitable
|-
! Description || Amount ($) || totals ($)
|-
| '''Cash flow from operations''' || || '''+70'''
|-
| &nbsp; Sales (paid in cash) || +30 ||
|-
| &nbsp; Incoming loan || +50 ||
|-
| &nbsp; Loan repayment || -5 ||
|-
| &nbsp; Taxes || -5 ||
|-
| '''Cash flow from investments''' || || '''-10'''
|-
| &nbsp; 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:

{| class="wikitable" style="text-align:right"
!
! colspan="3" | Company A || colspan="3" | Company B

|-
! || Year 1 || Year 2 || Year 3 || Year 1 || Year 2 || Year 3
|-
| style="text-align:left" | Cash flow from operations || +20M || +21M || +22M || +10M || +11M || +12M
|-
| style="text-align:left" | Cash flow from financing  ||  +5M ||  +5M ||  +5M ||  +5M ||  +5M ||  +5M
|-
| style="text-align:left" | Cash flow from investment || -15M || -15M || -15M ||   0M ||   0M ||   0M
|-
| style="text-align:left" | 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 ==
*[[Capital gain]]
*[[Cash flow sign convention]]
*[[Cash flow hedge]]
*[[Cash flow forecasting]]
*[[Cash flow statement]]
*[[Investment]]
*[[Owner earnings]]
*[[Passive income]]
*[[Profit (economics)|Profit]]
*[[Return of capital]]
*[[Return on equity]]

== References ==
{{Reflist}}

== Further reading ==
* Auerbach, A. J., & Devereux, M. P. (2013). ''[http://eprints.lse.ac.uk/58056/1/__lse.ac.uk_storage_LIBRARY_Secondary_libfile_shared_repository_Content_STICERD_PEP%20discussion%20papers_pep03.pdf 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==
*[https://ssrn.com/abstract=2014857 A Review of Academic Research on the Reporting of Cash Flows from Operations]
*[https://quickpseudo.com/calculators/business/cash-flow-calculator Example of Cash flow Calculator]
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{{DEFAULTSORT:Cash Flow}}
[[Category:Cash flow| ]]
[[Category:Accounting terminology]]
[[Category:Corporate finance]]
[[Category:Fundamental analysis]]