The amount of cash or cash-equivalent which the operating activities of an organizations receives or gives out by the way of payment to creditors is known as cash flow
The amount of cash or cash-equivalent which the operating activities of an organizations receives or gives out by the way of payment to creditors is known as cash flow. Cash flow analysis is often used to analyse the liquidity position of the company. It gives a snapshot of the amount of cash coming into business and flowing out.
As discussed cash flow can either be positive or negative. It is calculated by subtracting the cash balance at the beginning of a period which is also known as opening balance, form the cash balance at the end of the period or the closing balance. If the balance is positive, it means you have more cash at the end of given period. Therefore if the balance is negative, it means that you have less amount of cash at the end of a given period when compared with the opening balance at the starting of a period. Furthermore, to analyse where the cash is coming from and going out, cash flow are prepared. It has three main categories which is operating cash flow which includes day to day transactions, investing cash flow which includes transactions are done for expansion purpose, and financing cash flow which include transactions relating to the amount of dividend paid out to stockholders.
Next, the level of cash flow is not an ideal metric to analyse a company when making an investment decisions. A company balance sheet as well as income statements should be studied carefully to come to a conclusion. Moreover Cash flow can increase by selling more goods and services, selling assets, reducing costs, increasing selling price, and etc. Cash level might be increasing for a company because it might have sold some of its assets, but that doesn’t mean the liquidity is improving. If the company has sold off some of its assets to pay off debt then this is a negative sign and should be investigated further for more clarification. If the company is not reinvesting cash, then this is also a negative sign because in that case it is not using the opportunity to diversify or build business or expansion.