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cash flow

 
Dictionary: cash flow
 

n.
  1. The pattern of income and expenditures, as of a company or person, and the resulting availability of cash: The city improved its cash flow by borrowing against future revenues.
  2. The cash receipts or net income from one or more assets for a given period, reckoned after taxes and other disbursements, and often used as a measure of corporate worth.
cashflow cash'-flow' (kăsh'flō') adj.
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Investment Dictionary: Cash Flow
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1. A revenue or expense stream that changes a cash account over a given period. Cash in-flows usually arise from one of three activities - financing, operations or investing - though they also occur as a result of donations or gifts in the case of personal finance. Cash out-flows result from expenses or investments. This holds true for both business and personal finance.

2. An accounting statement - the statement of cash flows - that shows the amount of cash generated and used by a company in a given period, calculated by adding non-cash 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.

Investopedia Says:
1. In business as in personal finance, cash flows are essential to solvency. They can be presented as a record of something that has happened in the past, such as the sale of a particular product, or forecasted into the future, representing what a business or a person expects to take in and to spend. Cash flow is crucial to an entity's survival. Having ample cash on hand will ensure that creditors, employees and others can be paid on time. If a business or person does not have enough cash to support its operations, it is said to be insolvent, and a likely candidate for bankruptcy should the insolvency continue.

2. The statement of a business's cash flows is often used by analysts to gauge financial performance. Companies with ample cash on hand are able to invest the cash back into the business in order to generate more cash and profit.

Related Links:
Find out how a company spends its money and whether there will be any left over for investors. Analyze Cash Flow The Easy Way
Tune out the accounting noise and see whether a company is generating the stuff it needs to sustain itself. The Essentials Of Cash Flow
Learn how the CFS relates to the balance sheet and income statement as a part of a company's financial reports. What Is A Cash Flow Statement?
Differences between accrual accounting and cash flows show why net income is easier to manipulate. Operating Cash Flow: Better Than Net Income?
Pressure to be the best can sometimes push corporations to cheat. Learn how they do it and how to spot it. How Some Companies Abuse Cash Flow
Find out how analysts determine the fair value of a company with this step-by-step tutorial and learn how to evaluate an investment's attractiveness for yourself. Discounted Cash Flow Analysis
This measure may have its benefits, but it can also present earnings through rose-colored glasses. A Clear Look At EBITDA
Learn what it means to do your homework on a company's performance and reporting practices before investing. Advanced Financial Statement Analysis


 
Business Dictionary: Cash Flow
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Finance: analysis of all the changes that affect the cash account during an accounting period. Cash flow from Operations is one factor in a breakdown, usually shown as sources of cash and uses of cash.

Investment: net income plus depreciation and other noncash charges. In this sense, it is synonymous with Cash Earnings. Investors focus on cash flow from operations because of their concern with a firm's ability to pay dividends. See also Cash Budget.

Example for a real estate investment:

Potential gross income $10,000

Less: Vacancy and collection allowance - 1,000

Add: Miscellaneous income + 500 Effective gross income 9,500

Less: Operating expenses - 3,000

Less: Replacement reserve - 500 Net operating income 6,000

Less: Interest - 4,000

Less: Principal payment - 500 Cash flow $ 1,500

Cash flow is not the same as Taxable Income. Some items subtracted from cash flow to derive Taxable Income are money received from loans, Depreciation, and Amortization deductions. Some items that are added to cash flow to derive taxable income are loans retired and purchases of long-term assets.

 
Real Estate Dictionary: Cash Flow
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Periodic amounts available to an Equity investor after deducting all periodic cash payments from rental income. See Before-Tax Cash Flow, Cash Throw-Off, After-Tax Cash Flow.
Example: Table 10.

 
Dental Dictionary: cash flow
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n

The reported net income of a corporation plus amounts charged off for depreciation, depletion, amortization, and extraordinary charges to reserves, which are bookkeeping deductions not paid out in actual dollars and cents. A measurement tool used in recent years to offer a better indication of the ability of a company to pay dividends and finance expansion from self-generated cash than the conventional reported net income figure.

 

Financial and accounting concept. Cash flow results from three major groups of activities: operating activities, investing activities, and financing activities. A cash-flow statement differs from an income statement in reflecting actual cash on hand rather than money owed (accounts receivable). Its purpose is to throw light on management's use of its available financial resources and to help in evaluating a company's liquidity.

For more information on cash flow, visit Britannica.com.

 
Wikipedia: Cash flow
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Accountancy
Key concepts

Accountant
Bookkeeping
Trial balance
General ledger
Debits and credits
Cost of goods sold
Double-entry system
Standard practices
Cash and accrual basis
GAAP / IFRS

Financial statements

Balance sheet
Income statement
Cash flow statement
Ownership equity
Retained earnings

Auditing

Financial audit
GAAS
Internal audit
Sarbanes-Oxley Act
Big Four auditors

Fields of accounting

CostFinancialForensic
FundManagementTax

Cash flow refers to the movement of cash into or out of a business, a project, or a financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used

  • to determine a project's rate of return or value. The time of cash flows into and out of projects are used as inputs in financial models such as internal rate of return, and net present value.
  • to determine problems with a business's liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash, even while profitable.
  • as an alternate measure of a business's profits when it is believed that accrual accounting concepts do not represent economic realities. For example, a company may be notionally profitable but generating little operational cash (as may be the case for a company that barters its products rather than selling for cash). In such a case, the company may be deriving additional operating cash by issuing shares, or raising additional debt finance.
  • cash flow can be used to evaluate the 'quality' of Income generated by accrual accounting. When Net Income is composed of large non-cash items it is considered low quality.
  • to evaluate the risks within a financial product. E.g. matching cash requirements, evaluating default risk, re-investment requirements, etc.

Cash flow is a generic term used differently depending on the context. It may be defined by users for their own purposes. It can refer to actual past flows, or to projected future flows. It can refer to the total of all the flows involved or to only a subset of those flows. Subset terms include 'net cash flow', operating cash flow and free cash flow.

Contents

Statement of Cash Flow in a Business's Financials

Cash flows are classified into:

  1. Operational cash flows: Cash received or expended as a result of the company's internal business activities. It includes cash earnings plus changes to working capital. Over the medium term this must be net positive if the company is to remain solvent.
  2. Investment cash flows: Cash received from the sale of long-life assets, or spent on capital expenditure (investments, acquisitions and long-life assets).
  3. Financing cash flows: Cash received from the issue of debt and equity, or paid out as dividends, share repurchases or debt repayments

All three together - the net cash flow - are necessary to reconcile the beginning cash balance to the ending cash balance.

Ways Companies Can Augment Reported Cash Flow

Common methods include:

  • Sales - Sell the receivables to a factor for instant cash. (leading)
  • Inventory - Don't pay your suppliers for an additional few weeks at period end. (lagging)
  • Sales Commissions - Management can form a separate (but unrelated) company act as its agent. The book of business can then be purchased quarterly as an investment.
  • Wages - Remunerate with stock options.
  • Maintenance - Contract with the predecessor company that you prepay five years worth for them to continue doing the work
  • Equipment Leases - Buy it
  • Rent - Buy the property (sale and lease back, for example).
  • Oil Exploration costs - Replace reserves by buying another company's.
  • Research & Development - Wait for the product to be proven by a start-up lab; then buy the lab.
  • Consulting Fees - Pay in shares from treasury since usually to related parties
  • Interest - Issue convertible debt where the conversion rate changes with the unpaid interest.
  • Taxes - Buy shelf companies with TaxLossCarryForward's. Or gussy up the purchase by buying a lab or O&G explore co. with the same TLCF.[1]

Example of a positive $40 cash flow

Transaction In (Debit) Out (Credit)
Incoming Loan +$50.00
Sales (which were paid for in cash) +$30.00
Materials -$10.00
Labor -$10.00
Purchased Capital -$10.00
Loan Repayment -$5.00
Taxes -$5.00
Total.......................................... .......+$40.00.......

In this example the following types of flows are included:

  • Incoming loan: financial flow
  • Sales: operational flow
  • Materials: operational flow
  • Labor: operational flow
  • Purchased Capital: Investment flow
  • Loan Repayment: financial flow
  • Taxes: financial flow

Let us, for example, compare two companies using only total cash flow and then separate cash flow streams. The last three years show the following total cash flows:

Company A:
Year 1: cash flow of +10M
Year 2: cash flow of +11M
Year 3: cash flow of +12M

Company B:
Year 1: cash flow of +15M
Year 2: cash flow of +16M
Year 3: cash flow of +17M

Company B has a higher yearly cash flow and looks like a better one in which to invest. Now let us see how their cash flows are made up:

Company A:

Year 1: OC: +20M FC: +5M IC: -15M, total = +10M
Year 2: OC: +21M FC: +5M IC: -15M, total = +11M
Year 3: OC: +22M FC: +5M IC: -15M, total = +12M

Company B:

Year 1: OC: +10M FC: +5M IC: 0, total = +15M
Year 2: OC: +11M FC: +5M IC: 0, total = +16M
Year 3: OC: +12M FC: +5M IC: 0, total = +17M

  • OC = Operational Cash, FC = Financial Cash, IC = Investment Cash

Now it shows that 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. When comparing investments using cash flows always make sure to use the same cash flow layout.

See also

References

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Translations: Cashflow
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Dansk (Danish)
n. - et firmas ind- og udbetalinger

Français (French)
n. - marge brute d'autofinancement, cash flow

Deutsch (German)
n. - (econ.) Cashflow

Ελληνική (Greek)
n. - (οικον.) χρηματική ροή

Italiano (Italian)
flusso di cassa, liquidità

Português (Portuguese)
n. - fluxo (m) de caixa

Русский (Russian)
брутто-показатель самофинансирования

Español (Spanish)
n. - flujo de efectivo

Svenska (Swedish)
n. - kassaflöde

中文(简体)(Chinese (Simplified))
现金流转

中文(繁體)(Chinese (Traditional))
n. - 現金流轉

한국어 (Korean)
n. - 현급 유출입

日本語 (Japanese)
n. - キャッシュフロー, 利潤と減価償却引当金の合計

עברית (Hebrew)
n. - ‮תזרים מזומנים‬


 
 

 

Copyrights:

Dictionary. The American Heritage® Dictionary of the English Language, Fourth Edition Copyright © 2007, 2000 by Houghton Mifflin Company. Updated in 2007. Published by Houghton Mifflin Company. All rights reserved.  Read more
Investment Dictionary. Copyright ©2000, Investopedia.com - Owned and Operated by Investopedia Inc. All rights reserved.  Read more
Business Dictionary. Dictionary of Business Terms. Copyright © 2000 by Barron's Educational Series, Inc. All rights reserved.  Read more
Real Estate Dictionary. Dictionary of Real Estate Terms. Copyright © 2004 by Barron's Educational Series, Inc. All rights reserved.  Read more
Dental Dictionary. Mosby's Dental Dictionary. Copyright © 2004 by Elsevier, Inc. All rights reserved.  Read more
Britannica Concise Encyclopedia. Britannica Concise Encyclopedia. © 2006 Encyclopædia Britannica, Inc. All rights reserved.  Read more
Wikipedia. This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia article "Cash flow" Read more
Translations. Copyright © 2007, WizCom Technologies Ltd. All rights reserved.  Read more