What is Cash Flow?

Legal Definition
A cash flow describes a real or virtual movement of money:

  • a cash flow in its narrow sense is a payment (in a currency), especially from one central bank account to another; the term 'cash flow' is mostly used to describe payments that are expected to happen in the future, are thus uncertain and therefore need to be forecasted with cash flows;
  • a cash flow is determined by its time t, nominal amount N, currency CCY and account A; symbolically CF = CF(t,N,CCY,A).
  • it is however popular to use cash flow in a less specified sense describing (symbolic) payments into or out of a business, project, or financial product.

Cash flows are narrowly interconnected with the concepts of value, interest rate and liquidity. A cash flow that shall happen on a future day tN can be transformed into a cash flow of the same value in t0.

Cash flow analysis

Cash flows are often transformed into measures that give information e.g. on a company's value and situation:

  • 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 alternative measure of a business's profits 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.
  • 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 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. Subset terms include net cash flow, operating cash flow and free cash flow.

Symptoms of cash flow problems. There are many reasons a business can suffer cash flow problems – some are down to mismanagement and poor decisions, and in some cases factors outside of your control. Any of the following symptoms can indicate that a business is experiencing cash flow problems:

  • Up to overdraft limit – no headroom / returned payments
  • Stretch to pay salaries each month
  • Trade creditor arrears
  • Taxation arrears
  • Rent arrears
  • No working capital ‘buffer’ – surviving day to day
  • Negative working capital on balance sheet – over geared / losses?
  • Lack of funds for remedial action (redundancies / premises relocation)
  • Lack of profitability – insufficient to support owner / manager’s lifestyle
  • Unable to pay for professional advice

Cash flow problems can be avoided through good credit management; the Chartered Institute of Credit Management has produced a series of Managing Cash flow Guides which are available on its website (see references) which have been dowloaded more than 500,000 times at December 2015
-- Wikipedia
Legal Definition
The total amount of money being transferred into and out of a business, esp. as affecting liquidity.