Cash flow

Constant purchasing power accounting Profit (accounting) Cash flow statement

A cash flow is 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.

Within cash flow analysis, 3 types of cash flow are present and used for the cash flow statement:

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:

   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.

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:

The sum of the three components above will be the total cash flow of a company.

Examples

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

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