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Cash flow is the movement of money into and out of a company over a certain period of time. If the company's inflows of cash exceed its outflows, its net cash flow is positive. If outflows exceed inflows, it is negative. Public companies must report their cash flows on their financial statements.This information can be of great interest to investors as an indicator of a company's financial health.
Types of Cash Flow:
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Operating Cash Flow (OCF): Money generated from a company’s core business activities (like selling products or services).
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Investing Cash Flow (ICF): Cash used for or generated by investment activities (like buying equipment or selling assets).
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Financing Cash Flow (FCF): Cash received from or paid to investors and creditors (like issuing stocks or paying off loans).
Formula (Simple Version):
Net Cash Flow = Cash Inflows – Cash Outflows
A positive cash flow means more cash is coming in than going out — a healthy sign. A negative cash flow might be fine for startups investing in growth, but in the long term, it can be a red flag.
How Cash Flow Works
A company records its cash flow in a cash flow statement, one of the three key financial statements alongside the income statement and balance sheet.
The cash flow statement is broken into three parts:
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Cash from Operating Activities: Focuses on the company's core business operations.
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Cash from Investing Activities: Shows how cash is used for investments.
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Cash from Financing Activities: Reveals financial strategy decisions like raising capital or paying dividends.
How to Analyze Cash Flow
1. Look for Consistency:
Consistent positive cash flow from operations is a strong indicator of a company's health. It means the business can pay its bills, reinvest in itself, and survive economic downturns.
2. Compare Operating vs. Net Income:
If net income is high but operating cash flow is low, it could suggest earnings manipulation. Healthy companies usually have operating cash flows that match or exceed net income.
3. Understand the Source:
Cash flow from selling assets (investing activities) or taking loans (financing activities) isn't sustainable long-term. You want to see strong operating cash flow instead.
4. Free Cash Flow (FCF) Analysis:
Free Cash Flow = Operating Cash Flow – Capital Expenditures
Free cash flow shows what's left after the company spends money to maintain or grow its asset base. This leftover cash can be used for dividends, share buybacks, or reinvestment — it's a key indicator of financial flexibility.
Key Takeaways
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Cash flow tells you how much actual cash a company is generating.
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Positive cash flow is critical for survival and growth.
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Analyze where the cash is coming from: operations (good), or loans and asset sales (be cautious).
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Free cash flow is gold — it represents true financial strength.
You can show this simply like this:
🏦 What Is Cash Flow?
➡️ Movement of money in and out of a business.
🔥 Types of Cash Flow:
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Operating (OCF): From core business
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Investing (ICF): Buying/selling assets
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Financing (FCF): Borrowing/repaying money
⚙️ How It Works:
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Cash Flow Statement = Operating + Investing + Financing activities
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Net Cash Flow = Cash Inflows – Cash Outflows
🔍 How to Analyze:
✅ Consistency: Steady operating cash flow
✅ Reality Check: OCF should match or beat net income
✅ Source Matters: Strong OCF > Selling assets or loans
✅ Free Cash Flow (FCF):
FCF = Operating Cash Flow – Capital Expenditures
💡 Quick Tips:
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Positive cash flow = financial health 💵
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Free cash flow = money for dividends, growth, and survival 🌱
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