cashflow

Cash flow refers to the net amount of cash and cash equivalents moving into and out of a business, organization, or individual during a given period. It measures liquidity—the ability to cover short-term obligations—rather than overall profitability, since profits can be affected by non-cash items.

Cash flow is typically divided into operating cash flow (CFO), investing cash flow (CFI), and financing cash flow (CFF). The cash flow statement reports these categories and reconciles net income to net cash from operations, often using the indirect method, which adjusts net income for non-cash items and changes in working capital; the direct method lists actual cash receipts and payments.

Cash flow versus profitability: Positive net income does not guarantee positive cash flow; cash can be tied up in receivables or inventory, or spent on large capital expenditures.

Why it matters: It indicates whether a company can meet its day-to-day obligations, service debt, fund expansions, and distribute returns. Cash flow forecasting and liquidity management involve predicting incoming and outgoing cash, managing receivables and payables, and securing financing if needed.

Free cash flow (FCF) equals cash from operations minus capital expenditures. It represents cash available to all providers of capital and is used as an indicator of financial flexibility and value creation.

Risks include seasonal fluctuations, covenant requirements, and reliance on debt, all of which can cause cash shortfalls even in profitable firms.