What is Cash Flow?
What Does Cash Flow Mean
Is known as cash flow (or cash flow , in English) to the statement that reflects how much cash keeps someone after expenses, interest and payment to the capital. The expression that in the field of Accounting is known as a cash flow statement , therefore, it is an accounting type parameter that offers information in relation to the movements that have been made in a certain period of money or any of its equivalents.
Operating activities, investments and financing are part of the categories contemplated in the framework of the statement of cash flows. The operating cash flow indicates the cash received or invested as a consequence of the basic activities of the company. The investment cash flow does the same with respect to investment expenses (capital, acquisitions, etc.), while the financing cash flow considers the cash resulting from the receipt or payment of loans, the issuance or repurchase of shares and the payment of dividends.
By projecting these statements, the company can predict whether it will have the cash to cover its expenses and make a profit. Analyzing the cash flow statement, therefore, is a very important activity for small and medium-sized companies that often suffer from a lack of liquidity to meet their immediate needs. Cash flow enables forecasting and helps avoid emergency solutions (such as going to financiers for high-cost, short-term loans).
It should be noted that the elaboration of the cash flow enables the management of finances , contributes to decision-making and facilitates the control of expenses to improve profitability.
When analyzing the financial situation of a company, it is normal to pay special attention to operational and profitable issues, relying on the data obtained from the Income Statement (whose main objective is to inform whether a company produces profits or losses ). It is very frequent that this study includes comparisons with previous years, with pre-established objectives or with the status of other firms in the same sector.
In this way, conclusions can be drawn about the financial health of a company that, while useful, do not offer the necessary amount of detail and depth. This analysis will not be complete until the evolution of the assets is studied, through the so-called Balance Sheet. Thus, by combining the results of both accounting documents , a broader and clearer perspective can be obtained of the ability of a company to produce financial resources (cash flow) to face payments.
It is common for professionals in the analysis financial interpret negative cash flow as a worrying sign about liquidity, a clear warning of excessive debt levels. For this reason, in recent times there has been a tendency to invest in companies that show a positive and growing result.
Unfortunately, it is very normal for large companies to manipulate this data, both for the better and for the worse. Today, the financial information of companies is publicly known, thanks to the Internet, and many times the unfair measures to sink the competition begin through viral-type publications (which spread rapidly through the network) and, if they are endorsed by an analyst, they will have enough weight to generate doubts and instability. Slander fabricated from false or inaccurate data is often reason enough to affect a company's success on the stock market , even for a short time.