CASH FLOW

Cash flow refers to the movement of cash into or out of a business, or project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be usedto 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 alternate measure of a business's profits when it is believed that accrual accounting concepts do not represent economic realities. For example, 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 is a generic term used differently depending on the context. It may be defined by users for their own purposes. It can refer to actual past flows, or to projected future flows. It can refer to the total of all the flows involved or to only a subset of those flows. Subset terms include 'net cash flow', operating cash flow and free cash flow. Cash flows are classified into:Operational cash flows: Cash received or expended as a result of the company's internal business activities. It includes cash earnings plus changes to working capital. Over the medium term this must be net positive if the company is to remain solvent. Investment cash flows: Cash received from the sale of long-life assets, or spent on capital expenditure (investments, acquisitions and long-life assets). Financing cash flows: Cash received from the issue of debt and equity, or paid out as dividends, share repurchases or debt repayments

All three together - the net cash flow - are necessary to reconcile the beginning cash balance to the ending cash balance. Common methods include: Sales - Sell the receivables to a factor for instant cash. (leading) Inventory - Don't pay your suppliers for an additional few weeks at period end. (lagging) Sales Commissions - Management can form a separate (but unrelated) company act as its agent. The book of business can then be purchased quarterly as an investment. Wages - Remunerate with stock options. Maintenance - Contract with the predecessor company that you prepay five years worth for them to continue doing the work Equipment Leases - Buy it Rent - Buy the property (sale and lease back, for example.