Cash flow


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.

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:
The net cash flow of a company over a period is equal to the change in cash balance over this period: positive if the cash balance increases, 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:
OCF = incremental earnings+depreciation=+depreciation
OCF = earning before interest and tax*+ depreciation
OCF = * +depreciation
OCF = * + depreciation*
Depreciation* 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.

Examples

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