Cash flow refers to the flow of money into and out of business. The term is widely used in accounting, business management, and other financial contexts. Cash flow is often used to analyze the financial health of a business.
1. Cash Flow Statement
A cash flow statement reports the cash that has come in and the cash that has gone out of a business during a period. The operating activities section of the cash flow statement needs to be analyzed for companies that are exclusively involved in operating activities, such as retail stores or an airline. To do this, subtract all of the operating expenses from all of the revenues for that same period. The result is the cash flow from operating activities. A positive number in this section of the cash flow statement means that the business earned more than it spent for that period and vice versa. Cash flow is often used to analyze the financial health of a business. A company with a consistently positive cash flow can generally pay its bills and make timely payments to lenders.
2. Cash Flow to the Top Line
Cash flow to the top line is the amount of cash flowing in from operations during a period and is also called net cash flow. This amount is divided by the company’s total assets, generally from its balance sheet. The resulting figure is the percentage of interest in the business that the company brings in during a period of operations. In essence, cash flow to the top line is cash generated from a company’s operations. That cash needs to flow to the bottom line, or net income, for the company to profit. Cash flow to the top line is often used in determining how much yield a company can produce. In essence, it considers all noncash expenses, such as depreciation and amortization, that are not included in net income.
The top line, then, is the bottom line. Equity growth or earnings growth must take place for a business to turn a profit. If cash flow is positive, then the more interest a business gets in its operations, the more earnings it will be able to produce. If cash flow is negative, then it will take longer for a company to turn a profit than when cash flow is positive. Still, there are ways that this process can be accelerated by improving efficiency and reducing expenses. Credit ratings are available from different rating agencies, such as Standard and Poor and Moody’s.
3. Cash Flow to Operations
Cash flow to operations is the amount of cash coming in from the same sources that are being used by the business to generate some money. Cash flow from operating activities and cash flow from investing activities typically only compete for funds (especially if both sections are positive). Still, there is another source of funds that can also create a positive cash flow for operations. This additional source is cash flow returned as dividends. This type of funding source will increase a company’s leverage when it is used in conjunction with debt financing.
From 2012 to 2015, Apple’s net income increased by 2,155%, while its total shareholder return was 69%.
The operations section of the cash flow statement is also where cash flow is broken down by business unit or by line item. This section of the cash flow statement can help investors and analysts understand how a company is using its resources. The income statement (the other side of operating activities) will show how much money was used to earn revenue, minus how much was returned as dividends and debt repayment. The expenses section of the cash flow statement shows what was paid to buy the products and services from other companies, minus what was paid in interest on the debt.
4. Cash Flow to Investing Activities
Cash flow to investing activities is the cash flow a business receives from its investments. For a company to borrow money and make investments, it must have a sufficient supply of cash, which initially comes from the operating activities section. The operations section of the cash flow statement can show negative numbers if the business makes investments in earning assets, but then it uses those assets to pay back debt. Cash flow to investing activities can be positive or negative depending on how effective a business is at managing its liabilities and assets.
Cash flow refers to the flow of money into and out of business. The term is widely used in accounting, business management, and other financial contexts. Cash flow is often used to analyze the financial health of a business. The cash flow statement shows the source and use of cash within an accounting period. It identifies the current sources and uses of money, the timing and amount of changes, and the relationship between these trends.
