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Cash flow

Cash flow is a catch-all term for the movement of cash through a company. It can be used in several different contexts.

Expanded Definition

In its simplest meaning, cash flow just means the movement of cash into and out of a business. While that sounds simple in context, it is of prime importance for a business, as it will live or die on its cash flow.

Cash can come from several sources (purchase of goods or services sold by the business, borrowings by the business, or equity investment into the business), but ultimately, it is revenue which drives cash flow. If a business cannot generate cash from its sales -- to pay off its debt, to pay its employees, to pay its shareholders -- then it will die.

Uses for "cash flow"

In investing and accounting, the phrase "cash flow" is paired with other words to mean certain things. Here are several:

  • Discounted cash flow: An analysis technique of estimating future cash flows for the business and discounting them back to the present using the time value of money principle.
  • Operating cash flow aka "cash flow from operations": Cash generated by day-to-day operations of the business, such as collecting accounts receivable, buying inventory, or generating income. Part of the cash flow statement.
  • Free cash flow: A measure of how much cash could be returned to shareholders while keeping the business as it is now.
  • Investing cash flow aka "cash flow from investing": Cash generated or, more commonly, used in investments of the company. Includes such things as capital expenditures and the purchase or sale of short- and long-term investments. Also includes purchases of other companies. Part of the cash flow statement.
  • Financing cash flow aka "cash flow from financing": Cash generated or used in the issuing or paying of debt or the payment of dividends or the repurchase or sale of shares of the company. Part of the cash flow statement.

Cash flow statement

One of four financial statements showing the movement of cash into and out of the company for a period of time. Here, the analyst or investor can reconcile net income, a GAAP number, to actual cash in the bank.

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