Cash Flow

A business is a system that takes in money from sales as revenues and spends money on
expenses. A company may also receive income from interest, investments, royalties, and
licensing agreements. A firm may also sell products on credit, expecting to actually receive the
cash owed at a late date.

Assessing the amounts, timing, and uncertainty of cash flows, along with where they originate
and where they go, is one of the most important objectives of financial reporting. It is essential
for assessing a company’s liquidity, flexibility, and overall financial performance.

Positive cash flow indicates that a company's liquid assets are increasing, enabling it to cover
obligations reinvest in its business, return money to shareholders, pay expenses, and provide a
buffer against future financial challenges. Companies with strong financial flexibility can take
advantage of profitable investments. They also fare better in downturns, by avoiding the costs
of financial distress.

Cash flows can be analyzed using the cash flow statement, a standard financial statement that
reports on a company's sources and usage of cash over a specified time period. The cash flow
statement can be used to understand the trends of a company's performance that can't be
understood through the other financial statements like the balance sheet or income statement
on their own.

Cash Flow Categories

Cash Flows from Operations (CFO)

CFO, or operating cash flow, describes money flows involved directly with the production and
sale of goods from ordinary operations. CFO indicates whether or not a company has enough
funds coming in to pay its bills or operating expenses. In other words, there must be more
operating cash inflows than cash outflows for a company to be financially viable in the long-
term.

Operating cash flow is calculated by taking cash received from sales and subtracting operating
expenses that were paid in cash for the period. Operating cash flow is recorded on a company's
cash flow statement, which is reported both on a quarterly and annual basis. Operating cash
flow indicates whether a company can generate enough cash flow to maintain and expand
operations, but it can also indicate when a company may need external financing for capital
expansion.
Note that CFO is useful in segregating sales from cash received. If, for example, a company
generated a large sale from a client it would boost revenue and earnings. However, the
additional revenue doesn't necessarily improve cash flow if there is difficulty collecting the
payment from the customer. This would be reflected in operating cash flow that would be
negatively impacted.