Cash flow is the amount of cash coming into and going out of the organization. "Cash" includes actual money in bank notes, money held in the bank, and very liquid assets that can be turned into cash at any time. (Organizations usually want their cash to be earning better interest than a basic bank account.)
Having cash can be more important than making a profit. If all your profits are held as debts receivable or as stock, you might not have enough money to pay your bills. A business could have strong profits and still go bankrupt because it's not holding enough cash to pay its bills.
Cash is not the same as profit, for example:
Just to make it messy, cash flow also interacts with other aspects of your financial position. For example, it's not much help having lots of cash on hand if you're going to get a big bill soon.
Free Cash Flow (FCF) shows how much extra cash the organization is generating. It is calculated as follows:
Free cash flow = Cash flow of operations — Capital expenditure
If you have to pay for supplies well in advance and your buyers pay late, all your capital is locked up for all that time.
| Stronger position | Weaker position |
|---|---|
| You pay cash later for goods | You pay cash in advance for goods |
| Customers pay you sooner | Customers delay paying you as long as possible |
| You pay for goods but get a cash income from selling very quickly | You pay for goods but can't get a cash income from them within a reasonable time |
| You have uncommitted cash to pay your bills. | You need a loan to pay your bills. |
The cash flow statement measures changes in cash assets between balance sheets. It shows:
There are various formats for cash flow reports. Some of them look like an ordinary Profit and Loss statement, except that they only cover incoming and outgoing cash amounts.
In the US, corporations must report cash flow under three categories: