Cash flow

Meaning:

Cash flow refers to the movement of money into and out of a business during a specific period. It illustrates how cash is generated and utilized for business operations,

investments, and financing activities.

Example:

For instance, if a company earns ₹10,00,000 from sales (cash inflow) and spends ₹7,50,000 on expenses (cash outflow), the net cash flow would be calculated as

₹10,00,000 - ₹7,50,000 = ₹2,50,000, indicating positive cash flow.

How to understand Cash Flow:

• Cash flow is crucial for assessing a company’s liquidity and financial health, recording actual cash transactions rather than just accounting profits.
• It helps determine if a business can meet its short-term obligations and operate smoothly.

Types of Cash Flow:

• Operating Cash Flow (OCF): Cash generated or spent through normal business operations (e.g., cash from sales, payments to suppliers, salaries).
• Investing Cash Flow (ICF): Cash used for purchasing or selling long-term assets or investments (e.g., buying machinery, investing in shares).
• Financing Cash Flow (FCF): Cash received or paid to raise or repay funds (e.g., taking loans, issuing shares, paying dividends).

Importance of Cash Flow:

• It helps maintain liquidity, ensuring the business can meet day-to-day expenses.
• Positive cash flow indicates financial stability and the potential for growth.
• It aids in decision-making regarding investments, expansions, and cost management.