Cash flow

Cash flow, in general, refers to payments made into or out of a business, project, or financial product.^[1] It can also refer more specifically to a real or virtual movement of money.

For other uses, see Cash flow (disambiguation).

Cash flows are narrowly interconnected with the concepts of value, interest rate, and liquidity. A cash flow that shall happen on a future day $t N$ can be transformed into a cash flow of the same value in $t 0$ . This transformation process is known as discounting, and it takes into account the time value of money by adjusting the nominal amount of the cash flow based on the prevailing interest rates at the time.

to determine a project's 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.

rate of return

to determine problems with a business's . Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash even while profitable.

liquidity

as an alternative measure of a business's when it is believed that accrual accounting concepts do not represent economic realities. For instance, 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.

profits

cash flow can be used to evaluate the 'quality' of income generated by . When net income is composed of large non-cash items it is considered low quality.

accrual accounting

to evaluate the risks within a financial product, e.g., matching cash requirements, evaluating default risk, re-investment requirements, etc.

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:

Operational cash flows

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:

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.

Capital gain

Cash flow sign convention

Cash flow hedge

Cash flow forecasting

Cash flow statement

Investment

Owner earnings

Passive income

Profit

Return of capital

Return on equity

Auerbach, A. J., & Devereux, M. P. (2013). (No. w19579). STICERD - Public Economics Programme Discussion Papers 03, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. National Bureau of Economic Research.