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CASH FLOW - You're Forgiven for Misunderstanding the Term!

Guest post by: Stan Prokop

Article Overview: The article discussions misconceptions and terminology around the meanings and interpretation of cash flow.

CASH FLOW - You're Forgiven for Misunderstanding the Term!

We find that the term, or concept ' cash flow ' is widely misunderstood - having different meanings to different parties.

There are at least 7, if not more, methods in which the term is utilized in a number of areas of finance.

First of all the term is of course just a general term used in finance literature and textbooks relating to investments, etc.

When we see a company financial reports in the press there are often references to cash flow in the financial reports of the firm.

Getting even more specific, there are three parts to any financial statement, the balance sheet, the income statement, and the Cash flow statement. In older times this cash flow statement was called the Sources and Uses statement - simply indicating where a company got the money, and where they spent the money.

Some financial analysts refer to a company's ' funds statement ' and designate the total funds provided by operations as ' cash flow '.

Confused? We're not there yet. Financial managers and business owners use various types of analysis when making long term investments for the company. They use sophisticated financial analysis known as rate of return, payback analysis, and, guess what ' discounted cash flow ' analysis.

When a business owner is planning he will often prepare, and refer to, his ' cash flow ' budgeting.

And finally, business owners and financial mangers refer to; cash flow;

controls as they monitor the flow of funds and the control of those funds inside any company, small or large.

What becomes clear is that ' cash flow ' has become somewhat of a ' catch all ' wording and is somewhat confusing as more often than not it does not reference actual ' cash ' on hand, or evens the flow!!

Most financial people would probably agree the purest form of ' cash flow ' is in fact one of the items we have mentioned above - that is to say its the cash referred to in the company's CASH FLOW STATEMENT - we referred to it as one of the three pillars of any financial statement . The common calculation of this number is the net income of the company, plus the depreciation, which was not an actual cash outlay.

In summary, we have seen that the term cash flow means a lot of different things to different people - Business owners, and financial managers should know what method of cash flow they are utilizing, its uses, and how it will be interpreted by lenders, financial analysts, shareholders, etc.

And yes, you are forgiven for misunderstanding the term!

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Article Tags: cash flow misconceptions



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