Definition

Cash flow is a financial metric that measures the amount of cash and cash equivalents being generated and used by a business over a specific period of time. Unlike profit, which includes non-cash items such as depreciation, cash flow reflects the actual inflow and outflow of cash.

Applications

Cash flow is a critical metric for businesses as it provides insights into a company's liquidity, or its ability to meet short-term obligations. It is used in the following areas:

• Financial Planning: Cash flow is used as a basis for financial planning and helps determine the company's capital requirements.
• Investment Decisions: Investment projects are often evaluated based on their impact on cash flow.
• Business Valuation: Cash flow is a key factor in business valuation.
• Banks and Investors: Banks and investors use cash flow to assess a company's creditworthiness.

Types of Cash Flow

There are several types of cash flow, each representing different aspects of a business:

• Operating Cash Flow: Shows the cash flow from the core business operations. It indicates how much cash a company generates from its primary business activities.
• Investing Cash Flow: Describes the cash flow from investing activities, such as the purchase or sale of assets.
• Financing Cash Flow: Shows the cash flow from financing activities, such as borrowing money or issuing shares.
• Free Cash Flow: Free cash flow is operating cash flow minus capital expenditures. It indicates how much cash a company has left after all investments, available for distribution to shareholders or reinvestment.