Cash Flow Measure
A Cash Flow Measure is an microeconomic measure of the movement of money into or out of an economic entity.
- Context:
- It can be referenced in a Cash Flow Statement.
- It can range from being a For-Profit Operating Cash Flow to being a Not-for-Profit Operating Cash Flow.
- …
- Example(s):
- a Operating Cash Flow.
- a Free Cash Flow.
- …
- Counter-Example(s):
- See: Internal Rate of Return, Accounting Liquidity, Accrual Accounting.
References
2015
- (Wikipedia, 2015) ⇒ http://en.wikipedia.org/wiki/cash_flow Retrieved:2015-4-9.
- Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, limited period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation.
- to determine a project's rate of return or value. The time of cash flows into and out of projects are used as inputs in financial models such as internal rate of return and net present value.
- to determine problems with a business's liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash even while profitable.
- as an alternative measure of a business's profits when it is believed that accrual accounting concepts do not represent economic realities. For instance, a company may be notionally profitable but generating little operational cash (as may be the case for a company that barters its products rather than selling for cash). In such a case, the company may be deriving additional operating cash by issuing shares or raising additional debt finance.
- cash flow can be used to evaluate the 'quality' of income generated by accrual accounting. When net income is composed of large non-cash items it is considered low quality.
- to evaluate the risks within a financial product, e.g., matching cash requirements, evaluating default risk, re-investment requirements, etc.
- 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. Subset terms include net cash flow, operating cash flow and free cash flow.
Symptoms of cash flow problems.
There are many reasons a business can suffer cash flow problems – some are down to mismanagement and poor decisions, and in some cases factors outside of your control. Any of the following symptoms can indicate that a business is experiencing cash flow problems:
- Up to overdraft limit – no headroom / returned payments
- Stretch to pay salaries each month
- Trade creditor arrears
- Taxation arrears
- Rent arrears
- No working capital ‘buffer’ – surviving day to day
- Negative working capital on balance sheet – over geared / losses?
- Lack of funds for remedial action (redundancies / premises relocation)
- Lack of profitability – insufficient to support owner / manager’s lifestyle
- Unable to pay for professional advice
- Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, limited period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation.
- Joe Knight. (2015). “The Most Common Mistake People Make In Calculating ROI.” In: Harvard Business Review.
- QUOTE: … A common mistake in ROI analysis is comparing the initial investment, which is always in cash, with returns as measured by profit or (in some cases) revenue. The correct approach is always to use cash flow — the actual amount of cash moving in and out of a business over a period of time.
Occasionally companies analyze investments in terms of their effect on revenue. That’s because many young companies focus on hitting certain revenue targets to satisfy their investors. But revenue figures say nothing about profitability, let alone cash flow. True ROI analysis has to convert revenue to profit, and profit to cash. …
Once you grasp the cash vs. profit distinction you can better understand the four basic steps of ROI analysis.
- Determine the initial cash outlay. ...
- Forecast the cash flows from the investment. ...
- Determine the minimum return required by your company. ...
- Evaluate the investment. …
- QUOTE: … A common mistake in ROI analysis is comparing the initial investment, which is always in cash, with returns as measured by profit or (in some cases) revenue. The correct approach is always to use cash flow — the actual amount of cash moving in and out of a business over a period of time.