Cash Flow :

Cash flow refers to the movement of cash in and out of a business over a specific period of time. It is a crucial measure of a company's financial health and provides insight into its liquidity, solvency, and overall viability. Cash flow analysis is essential for planning, decision-making, and financial management.

Main purpose of cash flow

The primary purpose of cash flow analysis is to assess a company's ability to generate cash to meet its short-term and long-term financial obligations, such as paying bills, servicing debt, and funding growth initiatives. Positive cash flow is generally a sign of financial health, while negative cash flow may indicate financial distress.

3 types of cash flows

1. Operating Cash Flow (OCF)

This refers to the cash generated from the company's core business operations, including revenue from sales, payments from customers, and operating expenses.

2. Investing Cash Flow (ICF)

This represents the cash used for investing activities, such as purchasing fixed assets, investing in securities, or acquiring other businesses.

3. Financing Cash Flow (FCF)

This refers to the cash raised from or used for financing activities, such as issuing or repurchasing stock, paying dividends, or obtaining or repaying debt.

Cash flow formula

The cash flow formula calculates the net cash flow for a given period, which is the difference between the cash inflows and outflows. It can be expressed as:

Cash Flow = Operating Cash Flow + Investing Cash Flow + Financing Cash Flow

Lets Understand with an example

Harsh is the founder of a tech startup that has recently received its first round of funding from venture capitalists. To keep track of the ownership structure and make informed decisions about future financing,he decides to create a cap table.

1. Operating Cash Flow

The company generated $500,000 from software sales and received $100,000 in payments from customers. It also paid $200,000 in salaries, $50,000 in rent, and $50,000 in other operating expenses.

2. Investing Cash Flow (ICF)

The company spent $150,000 to purchase new computers and software for development.

3. Financing Cash Flow

The company received $200,000 from a small business loan, but also made a $50,000 payment to repay a portion of an existing loan.

Using the cash flow formula:
Cash Flow = ($500,000 + $100,000) - ($200,000 + $50,000 + $50,000) - $150,000 + $200,000 - $50,000 = $600,000 - $450,000 - $150,000 = $0

In this scenario, the company's cash flow for the period is neutral, with no excess cash generated or used. This information can help Harsh assess the company's ability to meet its financial obligations and plan for future investments or business decisions.

Hope this was helpful! There's more to explore! Learn about Customer-Acquisition-Cost here.