Glossary
Cash flow
The net amount of cash moving into and out of a business over a period, reported as operating, investing and financing flows.
On this page
Cash flow is the movement of actual money into and out of a business, or a household, over a period of time. A company can report a profit and still run short of cash, or report a loss while generating plenty, because accounting earnings include non-cash items and timing differences. That is why many investors regard cash flow as harder to manipulate and closer to economic reality than net income.
The three kinds
Companies break cash flow into three categories on the cash flow statement:
- Operating: cash from running the business, such as collections from customers minus payments to suppliers, employees and tax authorities.
- Investing: cash spent on or received from long-term assets, including capital expenditures, acquisitions and the sale of investments.
- Financing: cash raised from or returned to lenders and shareholders, including borrowing, debt repayment, dividends and buybacks.
Their sum is the net change in cash for the period.
How investors use it
- Free cash flow, operating cash flow minus capital expenditures, is the cash available for dividends, buybacks, debt reduction or acquisitions, and is the basis of discounted cash flow valuation.
- Cash burn describes negative operating cash flow at young companies; dividing the cash balance by the monthly burn gives a rough runway.
- Earnings quality. Operating cash flow persistently below net income can signal aggressive accounting or a business tying up cash in receivables and inventory.
One period can mislead: a big contract payment or a delayed supplier bill can swing a quarter's figure, so look at several years.