Cash Flow

Managing your money

Simply put, cash flow is the transfer of cash in or out of a business. However, it may also refer to the study of past or future trends in a company's credit history—in other words, its overall cash flow over time. Whether a business's cash flow is measured over the short or long term, this tracking process is vitally important in helping to determine the value of a company and the success of its various projects and investments. Not surprisingly, most companies (at least, those that last) take their cash flow management very seriously, as it can be a make-or-break factor when it comes to success in business.

Cash Inflows and Outflows

Generally, cash inflow is a revenue stream that is adjusted over time, usually as a result of several different activities, including financing opportunities, operations (running the company, and sometimes trying a new strategy) and investments. Cash outflow refers to expenses or investments that, ideally, will later on result in cash inflows.

A cash flow statement is an accounting document that demonstrates how cash is being generated by a company over a specific time period. It can be calculated by analyzing non-cash transactions, as well, like depreciation and net income after taxes, providing a clearer picture of a company's financial health. However, cash flow analyses are often also performed to study the viability of a major project launched by a firm and may not be so reflective of the company's overall financial outlook.

Cash Flow and Solvency

Having access to 24-hour cash flow is an essential part of a company's attempt to remain solvent and meet its financial requirements. A cash flow forecast is organized to show how a company's cash flow performed in the past, and may provide valuable insight prior to the start of a new project or investment. It's important for a business to have a sound financial forecast because it will ensure a company has enough to pay its creditors and employees. Any company whose cash flow drops to a point where it cannot make these payments is deemed insolvent and is on a rocky road to bankruptcy.

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