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Cash flow is the movement or ‘flow’ of money through a business over a particular time period. It can be used to calculate important statistics like the availability of cash to pay debts in a business (liquidity), or how quickly cash can be re-invested into a business once it has been spent (rate of return).
Net cash flows can be either positive or negative depending on whether the availability of cash increases or decreases. There are three areas of cash flow:
Operation Cash Flows: keeps a record of money the business spends or receives, sales or wages for example;
Investment Cash Flows: money that is invested in capital goods or that is earned by selling long-term assets;
Financing Cash Flows: funds that are paid out in profits for shareholders, or received from the issue of shares or debt.
These three branches combine to represent net cash flow of a business, and paint an accurate picture of the money passing through a business.
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