I read a lot about the definition but I can’t really get the hang of it.
Is it the cash that the company is left with at the end of the period? (Meaning the cash in their bank accounts *hypothetically*)
In: 14
It pretty literally means what it says. Its a measure of the flow of cash into and out of a company. Obviously of its negative for too long then the company will run out of cash to pay its bills.
it’s mostly used to refer to the amount the company is able to actually spend. so “cash” as in spendable money, not company “value” or stock or something else. so an employee might ask for a raise and their boss could say “we’re having cash flow issues right now, it’s probably not in the cards.” ie “we’re not making enough spendable money / have poorly allocated our spendable money, so we have to limit our spending”
> Is it the cash that the company is left with at the end of the period?
No. Two companies could have the exact same cashflow despite having vastly different amounts of cash.
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Imagine Adam has $1,000,000 cash in the bank. He uses $100 to buy some goods, which he later sells for $200. The cashflow of $100-out and $200-in results in a positive net cashflow of $100 over that time period.
Imagine Bob has $100 cash in the bank. He uses $100 to buy some goods, which he later sells for $200. The cashflow of $100-out and $200-in results in a positive net cashflow of $100 over that time period.
In this example, both Adam and Bob have the exact same cashflows despite Adam having ~$1,000,000 cash and Bob having ~$100 cash.
It’s the money that a company generates per time period, minus the money they spend per time period. Positive cash flow means that they are generating a profit.
Large cash flow is good (generally), because it means reducing expenses by a small % could have large total revenue, and makes the company more stable so it’s easier to get loans.
It’s a measure how much cash is coming into and out of a business. Unlike a company’s profit statement which only looks at the income generated from selling goods and services and the expenses associated with making and providing those goods and services, cash flow looks at all ways a company can generate and spend its money. This would also include taking out/paying off loans, purchasing new assets or selling them off, all sorts of things that wouldn’t be included in a profitability calculation. A company’s cashflow statement is a better and more complete picture of the health of a company’s operation than just looking at its profitability.
This (https://www.youtube.com/watch?v=hefAHWvrFDQ) from the excellent finance YouTube channel The Plain Bagel summarizes it best.
Think of it like a river map. A business report of cash flow is like a river water usage map. Where does it come in and where does it go?
The cash flow is reported periodically.
I think to understand this metric and why it’s important to the health of the business you also need to understand “turns.” Meaning how long does it take the company to covert to cash. There are a lot of reasons that can lead to a negative cash flow but it doesn’t necessarily mean a struggling business. You could just have longer terms on the receivables side, seasonality to your business, or heavy capex in a given period.
Let’s say you have $100. Deal 1 requires $100 and you will get $105 back at the end of the month. Deal 2 requires that same $100 and you will get $120 back but it will take 6 months.
Deal 2 has higher profit margins but assuming deal 1 is replicable every month, it would result in greater profits over a year.
Just like our own personal household, businesses have a fixed amount of cash. So cash flow/ cash conversion is an important metric to better understand how well the company is allocating its capital.
As you sell something cash is given to the company, as you buy new stock or materials to make new stock cash is spent by the company. Add these together and you have the cash flow of the business, if you are spending more on new stock than you are getting for selling the stock you have negative cash flow.
Cash flow is, as other commenters have mentioned, all about the flow of cash in and out of a company, and whether it is coming from certain activities. The big ones here are operating (sales revenue, cost of goods sold, etc), investing, and financing. Investing and financing are important for cash flow, because if a company wants to fortify itself by holding onto more cash or making a large investment, investors want to be able to see how much of that cash was coming from financing activities (like a debt issuance) or operating cash flows (which could be profits from an investor’s perspective), and whether a company is using that cash to fund operations or investments.
A broader topic that may be of use to you is how cash flow statements relate to the other two big financial statements companies issue: the income statement and the balance sheet.
The balance sheet is a snapshot of the company at the end of a quarter. It does tell you how the company looks in terms of assets (cash, owned property, etc) and liabilities (money the company owes, of various forms), but it tells you nothing by itself about any changes in those items over the period in question.
The income statement tells an investor a lot of the big things people care about. Revenue, expenses, profitability, and these are things that aren’t necessarily point-in-time, but are activities the company performed over the quarter. Similarly, cash flow statements tell you about activities over time, and can be assembled from balance sheets and income statements to tell an investor specifically what money is going where.
To round out your original question, if you wanted to know how much cash a company has on hand at a given time, you’d actually want to check out the balance sheet.
As an example, our company has to spend $100,000 to buy our best product. Then it takes 6+ weeks to ship from China. Once we get it here, we can sell it for $200,000. So on paper, our company looks very profitable.
But there’s that gap from when we have to pay for our products to when we can sell our products that is REALLY challenging. Our bank accounts are at -$100,000 for a couple of months, unless we can sell other products in the mean time. Our bank and our suppliers really don’t like it if our accounts hit negative numbers and we stop paying bills. Plus our employees want to get paid on time, and so do the utilities and mortgage. So we need to make sure we have other sources of income to cover that gap. That’s why it’s important to monitor cash flow.
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