What is Cash Flows ?

A company's profit after tax (or net income) is quite an arbitrary figure, obtained after assuming certain accounting hypotheses regarding expenses and revenues. On the other hand, its cash flow is an objective measure, a single figure that is not subject to any personal criterion. In general, to study a company's situation, it is more useful to operate with the cash flow (equity cash flow, free cash flow or capital cash flow) as it is a single figure, while the net income is one of several that can be obtained, depending on the criteria applied.

profits are incredibly important if you’re a small business, but cash is even more important. It’s possible that fast growing businesses can be profitable, and at the same time run out of cash. A cash flow statement can tell you if this is happening.

capital spending. This is the cost or gain related to the company's fix asset such as the cash used to buy a new equipment or the cash which is gained from selling an old equipment.

Many small businesses are pass through organizations and are taxed as Subchapter S Corporations. Owners of these companies will often take money out in the form of distributions. Distributions don’t show up on a profit and loss statement but do show up on a cash flow statement.

The sum of the three component above will be the cash flow for a project.

operating cash flow: It refers to the cash received or loss because of the internal activities of a company such as the cash received from sales revenue or the cash paid to the workers.

Changes in any of the three areas above won’t show up in your profit and loss statement. They will appear in your balance sheet, but you have to understand how to interpret the changes. In a cash flow statement they are easy to spot and that helps you understand what’s happening to your cash.

investment cash flow: It refers to the cash flow which related to the company's fix asset such as equipment building and so on such as the cash used to buy a new equipment or a building

Your profit and loss statement won’t show you if you’re buying too much equipment.  Your cash flow statement will.  If you need equipment, you can see how that equipment should be financed.

financing cash flow: cash flow from a company's financing activities like issuing stock or paying dividends.

As with equipment purchases, payments to your bank for principal don’t show up on your profit and loss statement.

These changes in your cash position often mean your business will run out of money if not managed properly.  They have nothing to do with your profit and loss statement but they have a huge effect on the cash in your business.  And, there is a major rule of business; if you run out of money you don’t get to play the game anymore.

Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business.

Cash flow is a generic term that can be used differently depending on the context. It can refer to actual past flows or projected future flows. It can refer to the total of all flows involved or a subset of them - for example, net cash flow, operating cash flow, and free cash flow.

At the most fundamental level, a company’s ability to create value for shareholders is determined by its ability to generate positive cash flows, or more specifically, maximize long-term free cash flow.

These terms will be defined later, but for now we will concern ourselves only with actual cash flows for a period of time in the past. It is important to define what is meant by 'cash':

Cash includes all of the money that the organization has in bank accounts and short-term investments that can quickly be turned into available cash.

Assessing the amounts, timing and uncertainty of cash flows is one of the most basic objectives of financial reporting.

Understanding the cash flow statement – which reports operating cash flow, investing cash flow and financing cash flow — is essential for assessing a company’s liquidity, flexibility and overall financial performance.

It is common for a balance sheet to show only a tiny amount for cash because businesses often operate with an overdraft and only petty cash is included.

There are two completely different accounting documents that have the words 'cash flow' in the title and it is important to avoid confusing the two of them.

Positive cash flow indicates that a company's liquid assets are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders, pay expenses and provide a buffer against future financial challenges.

These documents are a 'cash flow forecast' and a 'cash flow statement.' A cash flow forecast, which has already been mentioned, is an internal document produced on an ad hoc basis to help with budgeting. In contrast, a cash flow statement is one of the principal financial reports that an organization publishes each year in accordance with international accounting standards.

As a manager, you may be asked to produce a cash flow forecast to show your known and anticipated cash expenditure for some future period of time, usually the next budgetary period or the remainder of the current one. You will usually be expected to add an element of contingency into your cash flow forecast to cater for any unexpected costs that may arise.

Companies with strong financial flexibility can take advantage of profitable investments. They also fare better in downturns, by avoiding the costs of financial distress.