Cash flow

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A cash flow is a real or virtual movement of money:


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. This transformation process is known as discounting, and it takes into account the time value of money by adjusting the nominal amount of the cash flow based on the prevailing interest rates at the time.

Cash flow analysis

Cash flows are often transformed into measures that give information e.g. on a company's value and situation:

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.

Within cash flow analysis, 3 types of cash flow are present and used for the cash flow statement:

Business' financials

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:

Depreciation*(tax rate) 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.

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

And the cash flow for a company also include three parts:

The sum of the three components above will be the total cash flow of a company.


DescriptionAmount ($)totals ($)
Cash flow from operations+70
  Sales (paid in cash)+30
  Incoming loan+50
  Loan repayment-5
Cash flow from investments-10
  Purchased capital-10

The net cash flow only provides a limited amount of information. Compare, for instance, the cash flows over three years of two companies:

Company ACompany B
Year 1Year 2Year 3Year 1Year 2Year 3
Cash flow from operations+20M+21M+22M+10M+11M+12M
Cash flow from financing+5M+5M+5M+5M+5M+5M
Cash flow from investment-15M-15M-15M0M0M0M
Net cash flow+10M+11M+12M+15M+16M+17M

Company B has a higher yearly cash flow. However, Company A is actually earning more cash by its core activities and has already spent 45M in long term investments, of which the revenues will only show up after three years.

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