Cash flow

Meaning:

Cash flow refers to the movement of money into and out of a business during a specific period. It indicates how cash is generated and used for operations investments, and financing activities.

Example:

For example, if a company earns ₹10,00,000 from sales (cash inflow) and spends ₹7,50,000 on expenses (cash outflow), the cash flow shows the net amount left after these transactions.

How to understand Cash Flow:

1. Cash flow is essential for measuring a company’s liquidity and financial health.
2. It records actual cash transactions, not just profits on paper. A profitable business can still struggle if it doesn’t have enough cash for short-term needs.

Types of Cash Flow:

• Operating Cash Flow (OCF): Cash earned or spent through normal business operations (e.g., cash from sales, payments to suppliers).
• Investing Cash Flow (ICF): Cash used for buying or selling long-term assets (e.g., buying equipment, selling old machines).
• Financing Cash Flow (FCF): Cash received or paid to raise or repay funds (e.g., taking loans, paying dividends).

Importance of Cash Flow:

• It ensures the business has enough cash for daily expenses.
• Positive cash flow indicates a healthy financial position and growth potential.