Cash Flow: A Simple Definition

 

What Is Cash Flow?

The net amount of cash and cash equivalents that enter and leave a business is known as cash flow. Money spent symbolizes outflows, and money received represents inflows. A business's capacity to maximize long-term free cash flow (FCF) and produce positive cash flows adds shareholder value. After deducting any funds used for capital expenditures (CapEx), this represents the cash from regular business operations.

Important Notes

1. Funds spent represent outflows, and funds received represent inflows.

2. A financial statement that details the sources and uses of a company's cash over time is the cash flow statement.

3. Cash flows from operations, investments, and finance are three different ways a corporation can organize its cash flow.

Formula and Calculation of Cash Flow

With the following formula, you can quickly determine the cash flow of a corporation. To do this, make sure you locate the total cash intake and the entire cash outflow.

CF = TCI - TCO

Where:

Total Cash Inflow (TCI)

Total Cash Outflow (TCO)

Understanding Cash Flow

The money that comes into and leaves a business is referred to as cash flow. Businesses incur expenses (outflow) and get revenues (inflow) from sales. In addition, they might profit from investments, royalties, interest, and licensing deals in addition to selling goods on credit. Evaluating cash flows is crucial to determining the liquidity, adaptability, and overall financial success of a business.

A corporation with positive cash flow is better able to pay its debts, reinvest in the company, return capital to investors, pay for operating expenses, and act as a safety net against unforeseen financial difficulties. Strong financial flexibility helps businesses avoid the costs associated with financial distress, which makes them more resilient, particularly during economic downturns.

Cash Flow Statement

The balance sheet and income statement of a business are balanced by the cash flow statement, which functions as a corporate checkbook.1. The net gain or decrease in cash and cash equivalents (CCE) is the bottom line shown in the cash flow statement.

The company's total change in cash and its equivalents over the previous period is shown in the bottom line. The amount at the bottom of the cash flow statement and the difference between the current CCE and that of the prior quarter or year should match.

Types of Cash Flow

Operating Cash Flows (CFO)

The term "cash flow from operations" (CFO) refers to financial flows that are directly related to the manufacture and sale of items through routine business activities. CFO, sometimes referred to as operating cash flow, shows whether or not a business has enough revenue to cover its operating costs and obligations.

Investing Cash Flows (CFI)

The amount of money made or spent on various investment-related activities throughout a given time is reported in the cash flow from investing (CFI), also known as investing cash flow. Buying speculative assets, investing in securities, and selling assets or securities are examples of investing activities.

How to Analyze Cash Flows

To arrive at different metrics and ratios needed to make well-informed judgments and recommendations, analysts and investors might benefit from combining the cash flow statement with other financial accounts.

An illustration of cash flow

The cash flow statement for Walmart (WMT) for the fiscal year that ends on January 31, 2024, is shown below. All sums are expressed in millions of dollars.

The cash flow from the investing operations component accounts for purchases of other companies as well as investments in property, plant, and equipment (PP&E). Cash flow from financing activities includes payments made for dividends, repayments of debt, and the issuance of long-term debt.

Walmart maintained cash in the company as seen by its positive cash flow, which increased by $1.09 billion. 

How Are Cash Flows Different Than Revenues?

The money received from the sale of goods and services is known as revenue. Money from sales of goods sold on credit or through a subscription payment plan may not have been received and are recorded as accounts receivable. These don't reflect the company's real cash flows at the time. Cash flows are also used to monitor and classify inflows and outflows based on their source or purpose.

What Distinguishes Profit from Cash Flow?

Profit is not the same as cash flow. Profit is particularly used to gauge a business's overall financial success or the amount of money made. This is the sum of money that remains after a business settles all of its debts. A company's profit is calculated by deducting its costs from its revenue.

Why Is Free Cash Flow Important and What Does It Mean?

After a business pays for its capital expenditures and operating costs, it has free cash flow left over. It is the sum of money left over after taxes, rent, and payroll. Businesses are allowed to use FCF in any way they see fit.

Should Businesses Submit a Cash Flow Statement?

The income statement and balance sheet are enhanced by the cash flow statement. Since 1987, it has been a requirement for financial reporting by public companies.

The Price-to-Cash Flows Ratio: Why Is It Used?

An indicator of how valuable a stock is about its operating cash flow per share is the price-to-cash flow (P/CF) ratio, which is a stock multiple. By adding back non-cash costs like depreciation and amortization to net income, operating cash flow is used in this ratio.

P/CF is particularly helpful for appraising firms that have a good cash flow but are not profitable due to significant non-cash expenses.

In summary

Money coming in and going out is referred to as cash flow. Positive cash flow signifies higher revenue for the company, whereas negative cash flow points to higher expenses. The total amount of cash inflows less the total amount of cash outflows is net cash flow.