There are plenty of different terms that get thrown around in the financial, business, and investing worlds but few that are so important to understand as cash flow. If you’re unsure of the specifics of just what cash flow actually is, then you owe it to yourself and your portfolio to learn more about it as soon as you possibly can. There are plenty of different variables that go into it, but grasping the basics behind it is a fairly straightforward concept and one that you certainly can’t afford to ignore. Here’s a quick look at the basic principles behind it.
Essentially, cash flow is nothing more than the movement of money in and out of an organization, account, project, or other financial structure. It’s often called a cash stream or funds flow as well, but all the terms mean the same thing. In nearly all cases it isn’t measured on a daily or hourly basis but rather assessed over a set period of time, although that period of time can be as long or as short as needed to ascertain whatever is being measured. A few basic things will influence cash flow, and understanding them is a good idea as well.
Cash flow is broken down into two simple categories – inflow and outflow. Inflow is affected by numerous different things including financing, investing, and operations. Financing obviously covers things like loans, investing is related to private investors or to the sale of shares on the open market, and operations is the profit a company brings in through its regular activities. Outflow normally consists of business expenses as well as any investments made, including general overhead or other factors. Obviously, inflow being higher than outflow is needed for a company to remain profitable and have any chance at success in the marketplace.
Cash flow statements are utilized to provide a detailed look at the overall cash flow of an organization, and are used by accountants, investors, creditors, shareholders, and others who are tied closely to the financial success or failure of a company. In the case of investors, for example, using cash flow statements is vital for gauging the risk associated with an investment. The same is applicable to creditors before they extend a loan to the organization in question. In short, this is one area of finance and investment that you simply can’t afford to ignore. Take the time to review any statement in detail before you elect to make an investment.