There are a number of different reasons to begin investing, though generally speaking we can safely say that there are two primary reasons to invest. Most commonly, people invest for long term financial growth and stability. They put money into a stock or bond in hopes that this security will increase in value over time, generate greater returns and allowing them to improve their profits in the long term. It also is common, however, to find people who are investing for cash flow. While people who do this might also benefit from long term returns, it is common for people who use these methods to need consistent incomes that they can count on.

When we talk about investing for cash flow, we are talking about making investments that can lead to continual cash deposits. People who need cash flow might be individuals who are interested in having some money that they can access immediately. Business owners also tend to be interested in these kinds of investments. Cash flow is essential for paying employees, utilities, and other services that are not long term assets. In fact, any person who would like to easily transform their investments or assets into cash that they can easily access might decide to make investments that ensure smooth cash flow.

The next question you might have, however, regards how you can begin investing for cash flow. How can you know when you have an investment that actually can help you to have instant access to cash versus an investment that allows you to save money over the long term? Part of this is using common sense. For example, if you have a deferred interest debt asset in which you won’t even see returns until years in the future, you probably can’t count on this investment for cash flow. If you want to invest in a business in which you receive quarterly returns or in oil or even in book or media royalties, however, you can be sure that cash will be coming back to you.

While investing for cash flow is useful for people who need to turn their assets into quick money, using long term investments, such as stocks, for cash flow can be dangerous and actually can cause you to lose money in the long term. When it comes to getting cash quickly from investments, it’s important that you understand how your investment works and how you can generate the highest profits without sacrificing accessibility.

On March 14, 2012 By Richard Wilson

Practice Test

Cash Flow – Understanding Cash Flow

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.

On September 7, 2011 By Richard Wilson

Practice Test

Projecting Cash Flow

The following video is borrowed from our BusinessTraining.com platform and was originally recorded for our financial modeling training program. In the following video, we provide an in-depth guide to projecting cash flow.

Video Transcript/Summary: The strategies and tips provided within this video module include:

The first line is some form of income, either Net or Operating Income, depending on the business.. Adjustments are made on the operating, investing and financing cash flows.
Operating Cash Flow: The change in Accounts Receivable (A/R) in the Balance Sheet (B/S) needs to be reflected in the cash flow statement. If A/R decreases on the B/S, it means we have collected more from customers and therefore the amount is added to the Cash Flow statement.
A decline in inventory on the B/S means more cash being received and needs to be added to cash flow statement. An increase in prepaids though, needs to be deducted from the cash flow statement. An increase in payables is treated similarly to the inventory adjustment adjustment. An increase in depreciation should not be reflected in the cash flow statement and is added back.
Investing Activities: Increase in parts inventory is reflected by including the change as a negative on the cash flow statement. The same can be said for Land and Land expenses, in addition to Machinery and Equipment, Transport etc.
Financing: Any increase in payables means the business held onto cash longer and is therefore added back on the cash flow statement.
Subtracting these cash adjustments from the beginning cash at the start of the period equals the cash at the end of the period.

I hope that this has been a useful lesson on cash flow projection.

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