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Cash flow is the movement of money coming and going into a company’s account. This is reported in its earnings announcement. It can either refer to a single project or the entire business operation.
A positive cash flow shows that a company’s liquid assets are increasing. This allows the business to reinvest in its operations, pay its shareholders, cover any outstanding obligations, as well as provide a buffer against future financial challenges. Companies that have strong financial flexibility can also fare better when there are downturns in the market. Conversely, a negative cash flow indicates a higher degree of spending, though it may not necessarily be a bad thing if a company is investing its cash to expand its operations.
There are many different types of cash flow, such as:
Cash flow from operations (CFO): This describes money that is directly involved with the production and sales of goods. CFO generally indicates whether a company has enough funds coming in to pay its operating expenses.
Cash flow from financing (CFF): This shows the net flow of cash that is used to fund the company and its capital. Some transactions include issuing equity, debt, and paying dividends to shareholders. This indicates a company’s financial strength and how well its capital structure is managed.
Cash flow from Investing (CFI): This shows how much cash is generated or spent from investment-related activities in a specific time frame. Some activities include purchasing assets, investing in securities, or selling assets and securities.
Cash flow and profit do not refer to the same thing.
Cash flow specifically refers to all the money that moves in and out of a business, while profit is used to measure how much a company makes after its expenses. Profit is calculated by subtracting a company’s expenses from its revenue, which is the amount of its total earnings.
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