What is Cash Flow?


Cash Flow is important in finance. Without knowing about cash flow we can’t manage our finance properly. Let’s read information about cash flow.


1. A revenue or expense stream that changes a cash account over a given period. Cash inflows usually arise from one of three activities – financing, operations or investing – although this also occurs as a result of donations or gifts in the case of personal finance. Cash outflows result from expenses or investments. This holds true for both business and personal finance.

2. An accounting statement called the “statement of cash flows”, which shows the amount of cash generated and used by a company in a given period. It is calculated by adding noncash charges (such as depreciation) to net income after taxes. Cash flow can be attributed to a specific project, or to a business as a whole. Cash flow can be used as an indication of a company’s financial strength.

Reference : Investopedia

How about that definition ? Maybe it could give a basic knowledge about cash flow. Now, read more explanation about cash flow :-

Most of us think we really know about the definition of cash flow but not all of us right about it. Most of us believe that cash flow is the revenue that generate less the expenses. It is not really the answer. It is lies that the accounting rules that govern the creation of financial statement. It is more focused on measuring profit or loss not cash flow. Not all cash flow item show up in an income statement. It is made up of more than just profit and loss. It also affected by :-

1. Accounts receivable

Account receivable is money owed to a business by its clients and shown on its balance sheet as an asset. It is one of a series of accounting transaction dealing with the billing of a customer for goods and services that the customer has ordered. ( Wikipedia)

Accounts Receivables
2. Inventory

The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business’s assets that are ready or will be ready for sale. Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company’s shareholders/owners. (Investopedia )

3. Accounts payable

Money which a company owes to vendors for products and services purchased on credit. This item appears on the company’s balance sheet as a current liability, since the expectation is that the liability will be fulfilled in less than a year. When accounts payable are paid off, it represents a negative cash flow for the company. (InvestorWords )


4.  Capital expenditures

A capital expenditure is one in which a durable asset is purchased that is intended to increase the profits of a business for an extended period. That is in contrast to a consumable which is depleted as it is used and must be replaced. Consumables are treated as an expense. (The Motley Fool)

5. Borrowings and debt service

– I don’t find any definition but it is related to loan, bankers, etc… Correct me if I’m wrong.

6. Other “timing” differences

Timing difference is the concept of the accounting that occurs due to the transition problems. The timing difference is the term that is extremely used in the financial reporting or taxation purposes. The method of calculation of the depreciation is different in both financial accounting and taxation. While the company is using the straight-line method for the depreciation, the tax authorities will use the accelerated depreciation method. This will cause the timing difference in the tax liability of the company even though the depreciation calculated by both methods is the same and the time period for the depreciation is also the same.
Timing difference is also considered while calculating the differed tax liability. Timing difference is the term that is designed to point out the difference in time in which a transaction affects the items of the financial statements for the accounting purpose and the point in which it affects the items for the taxation purpose. In this way, financial statements can be went trough the timing differences and the things can be pointed out easily which are affecting.
Since the depreciation calculation methods are different for the accounting and taxation purposes, this usually results in timing difference. Although, the total depreciation will eventually be the same, the timing difference will arise in the tax liability. (ReadyRatios )

We need to understand component that affect cash flow. It need schedule to show what’s going on with each of the components of cash flow.

Reference :- Inc.com


Okay, that’s some basic about cash flow that I’ve learned. Hope you can added anything you know about cash flow. To learn more about cash flow get the book below :-

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