Cash Flow

Net amount of cash moving in and out of a business.

Cash flow is the net amount of cash and cash equivalents being transferred into and out of a business over a specific reporting period. Unlike net income, which includes non-cash accounting entries like depreciation and accounts receivable, cash flow represents the actual physical money available to run the business, pay debts, and reinvest in growth. Cash flow is typically categorized into three distinct activities on a company's cash flow statement: operating activities (core business transactions), investing activities (purchases and sales of long-term assets like equipment), and financing activities (issuing stock, paying dividends, or borrowing debt). By analyzing these three sections, investors can see exactly where a company is generating its cash and how it is choosing to spend it. Investors pay close attention to cash flow because it is much harder to manipulate through accounting adjustments than net income. A company can report strong paper profits but still go bankrupt if its cash is tied up in unpaid invoices or unsold inventory. Conversely, a young growing company might show net losses due to heavy upfront investments but maintain a healthy cash flow that keeps it solvent and flexible.

Company A reports a net income of $100,000. However, during the year, it had $20,000 in non-cash depreciation expenses, its inventory increased by $15,000 (cash spent), and its accounts receivable increased by $10,000 (sales made on credit, cash not yet received). Its operating cash flow is calculated as: $100,000 (Net Income) + $20,000 (Depreciation) - $15,000 (Inventory Increase) - $10,000 (Receivables Increase) = $95,000.