What is Cash Flows ?

Cash flows are narrowly interconnected with the concepts of value, interest rate and liquidity. A cash flow that shall happen on a future day tN can be transformed into a cash flow of the same value in t0.

It is entirely possible to be earning revenue while losing money. In fact, a business undergoing a period of high growth might experience just that because they’re reinvesting or taking on financing in order to accommodate this growth.

to 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.

In this scenario, the revenue numbers look great, but the cash flow statement will show the deficit.

Discrepancies between accounts receivable and accounts payable can also cause a business to be cash flow negative even when sales are stable or strong. Again, the income statement would show positive revenue. However, the cash flow statement would tell a completely different story.

as an alternative measure of a business's profits when it is believed that accrual accounting concepts do not represent economic realities.

For instance, 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).

If a customer invoice isn’t paid, it can’t be counted as cash flow. Even if the customer pays on time, if you’ve given them three months to pay when your creditors want you to pay them one month from now, you’ve got a cash flow problem. In additional to unfavorable terms

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.

late payments also wreak havoc on cash flow. There are many moving parts to cash flow and you need to know which gears are running smoothly and which ones are out .

to evaluate the risks within a financial product, e.g., matching cash requirements, evaluating default risk, re-investment requirements, etc.

Although testing to see if you notice the faces or vase first is a conversation starter on perception and cognition, learning to understand and interpret your financial statements is imperative to the survival of your business.

Cash flow notion is based loosely on cash flow statement accounting standards.

The term is flexible and can refer to time intervals spanning over past-future. It can refer to the total of all flows involved or a subset of those flows. Subset terms include net cash flow, operating cash flow and free cash flow.

If you can see the spacecraft between all the dots in a Magic-Eye-inspired print, fantastic.

The (total) net cash flow of a company over a period (typically a quarter, half year, or a full year) is equal to the change in cash balance over this period: positive if the cash balance increases (more cash becomes available), negative if the cash balance decreases.

The total net cash flow for a project is the sum of cash flows that are classified in three areas

If you can see the spacecraft between all the dots in a Magic-Eye-inspired print, fantastic. If you can predict a potential cash flow shortfall and keep your business on track, even better — and somewhat more practical.

Operational cash flows: Cash received or expended as a result of the company's internal business activities.

Make sure you see what needs to be seen. Produce and review your financial statements on a regular basis. Work with an accountant who understands your business and its needs.

So how to calculate operating cash flow of a project? OCF=incremental earnings+depreciation=( earning before interest and tax-tax)+depreciation=earning before interest and tax*( 1-tax rate)+ depreciation= ( revenue - cost of good sold- operating expense- depreciation)* (1-tax rate)+depreciation= ( Revenue - cost of good sold- operating expense)* (1-tax rate)+ depreciation* tax.

By the way, depreciation*tax which locates at the end of the formula is called depreciation shield through which we can see that there is a negative relation between depreciation and cash flow.