Cash Flow

Cash flow refers to the net amount of cash and cash-equivalents being transferred into and out of a business. It’s a key indicator of a company’s financial health, as it shows the company’s ability to cover its expenses, reinvest in its business, return money to shareholders, or pay off its debts.

There are three main types of cash flows:

1. Operating Cash Flow (OCF): This represents the cash generated from the company’s core business operations. It’s calculated by adjusting net income for changes in non-cash items (like depreciation) and changes in working capital (like changes in accounts receivable and accounts payable). Positive operating cash flow indicates that the company is generating enough cash from its operations to sustain the business.

2. Investing Cash Flow: This shows the cash used for investing in assets, as well as the proceeds from the sale of other businesses, equipment, or long-term assets.

3. Financing Cash Flow: This reflects the net flow of funding the company receives from its investors and lenders, including cash from issued shares or paid dividends, and from adding or repaying debt.

The sum of these three components gives the company’s net cash flow. If a company’s net cash flow is positive, it means the company’s cash balance has increased over the period. If it’s negative, the company’s cash balance has decreased.

Understanding a company’s cash flow is crucial for both internal management and external investors, as it provides a clear picture of the company’s ability to generate cash and its financial stability.