Cash Flow – Definition & Meaning

Cash flow is the net movement of cash and cash-equivalents into and out of a business over a period. It shows how much cash the company generates and uses from operations, investing, and financing activities.

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Key Takeaways

• In one sentence: Cash flow tracks actual cash coming in and going out during a period.
• Why it matters: It reveals liquidity, funding capacity, and the ability to pay bills, invest, and return capital to shareholders.
• Context/usage: Reported in the cash flow statement alongside the balance sheet and income statement.
• Three sections: Operating (CFO), Investing (CFI), and Financing (CFF).

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What Is Cash Flow?

In finance, cash flow measures cash generation and usage independent of accrual accounting. Unlike net income (which includes non-cash items), cash flow focuses on real cash movements. Analysts examine total net cash flow and each section-operating, investing, and financing-to understand quality of earnings and sustainability.

Core Formulas

Net Cash Flow = Cash Inflows − Cash Outflows
Free Cash Flow (FCF) = Operating Cash Flow − Capital Expenditures
Operating Cash Flow (Indirect) = Net Income + Non-cash Charges ± Changes in Working Capital

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How Cash Flow Works

• Operating Cash Flow (CFO): Cash generated by core business (adjusts net income for non-cash items like depreciation and working capital swings in receivables, payables, and inventory).
• Investing Cash Flow (CFI): Cash used for long-term assets (CapEx, acquisitions) or received from asset sales.
• Financing Cash Flow (CFF): Cash from/used in debt and equity (borrowings, repayments, share issuances/buybacks, dividends).

Example of Cash Flow Calculation

Suppose a company reports net income of $200k, depreciation $40k, an increase in AR of $30k, an increase in AP of $20k, and CapEx of $70k.

• Operating Cash Flow:

CFO = $200k + $40k − $30k + $20k = $230k

• Free Cash Flow:

FCF = $230k − $70k = $160k

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Benefits and Considerations

• Liquidity insight: Cash flow shows if earnings convert to cash.
• Debt capacity: Strong CFO supports interest and principal payments.
• Investment flexibility: Positive FCF funds growth and buybacks/dividends.
• Considerations:
  • One-off timing effects (e.g., stretching payables) can temporarily boost CFO.
  • Large CapEx depresses near-term FCF but may enhance long-term value.
  • Non-recurring financing flows can obscure underlying performance-analyze all three sections together.

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Related Terms

• Cash Flow Statement: Report detailing CFO, CFI, and CFF for a period.
• Income Statement: Accrual-based revenues and expenses over a period.
• Balance Sheet: Point-in-time view of assets, liabilities, and equity.
• Free Cash Flow (FCF): Discretionary cash after operating needs and CapEx.