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What Is Cash Flow (CF)?

In a general term, cash flow is the increase and decrease in the amount of money an individual has. However, in financial terms, it’s regarded as the cash or cash equivalent that’s consumed by an organization, business institute, or firm within a given time.

You can find a firm’s cash flow statement in its financial statement. It is one of the three financial statements that reports the cash transaction of a company. Others are the balance sheet and income statement.

How Does Cash Flow Work?

CF works when a few adjustments are made to your net income by subtracting and adding the differences in your transactions and revenue expenses. As a business owner, cash flow tells you the current financial situation of your company. 

You could think of it as your “business checking statement” with time which flows in both ways. Moreover, that’s the cash entering your business from customers who buy your goods or products and the cash going out in the form of payments such as salaries, mortgages, or rents.

If the input of cash to your business or company exceeds your output, then you’re in a positive CF. Otherwise, it’s a negative cash flow and you probably could be at risk of being overdrawn and may need cash to cover your overdraft.

What Is an Example of a Cash Flow?

A cash flow is simply the inflow and outflow of cash from a company. To further buttress this point, let’s consider this example:

Amazon makes sales of $1 billion in a fiscal year which includes the interest and dividends they got from their investments. In that same year, their total cash outflow was worth $1 million. 

From the above example, we can see that Amazon made more profits in that year than expenses. So we can say that they had a positive cash flow.

What Is the Meaning of CF?

Cash flow is the movement or flow of cash in and out of a business. You could think of a business as a system that produces cash in the form of revenues or incomes and spends it on expenses.

As a business owner, the cash you get for rendering a service or selling products to persons is the inflow of cash while the one spent on expenditures is the outflow of cash.

Why are Cash Flows Important?

Cash flows are important because it helps you monitor the progress of your business account. The one reason why many businesses fail and shut down is due to lack of cash. And so, proper analysis of your company’s cash flow will help you avoid that, especially as a new business.

Additionally, it helps seasonal businesses. These businesses often have large fluctuations of cash at different times of the year manage due to their flow of income. Although sustaining this kind of business may be tricky and sometimes difficult, however, it’s possible if done with diligence.

Lastly, cash flows are also important for startups. One of the issues attached to new businesses is cash flow. This is because there’s usually a truckload of expenses attached to startups, and they probably may not have as many sales to sustain them. 

Therefore, with proper cash flow analysis, you’ll only spend on what’s important, thereby sustaining you on a balanced scale. 

What Is a Good Cash Flow?

A company has good cash flow when its income is more than its expenditures. This shows that a company’s assets are increasing which means they can invest, pay expenses, and provide security against the financial challenges that may occur in the future.

What Is the Statement of Cash Flows?

A statement of cash flow is also referred to as a cash flow statement. It’s a financial statement of account that shows the changes in the income and balance sheet of a firm and how it affects a company’s cash and cash equivalents.

Also, it shows the operating performance of a firm and how to predict the timing, amount, and probability of cash flows in the future. A statement of cash flows helps investors to know how productive a company’s flow of cash has been.

It also lets them in on how profitable their investment into that business or company will be. Having a statement of cash flow is important because it helps you as a company keep track of your productivity level financially. 

There are 3 components of a statement of cash flows. They are:

Cash Flows from Operations (CFO)

CFOs in simple terms are the cash generated from all of the operating activities of a company. It’s the difference between the income generated from the sales of a product with its actual cost. With CFOs you’re able to know how much money you make from sales, production, and the delivery of your company.

A few things that could be classified as a CFO are:

  • Salaries paid to workers
  • Production expenses of the company
  • Expenses on the trading of goods
  • Interest income and dividend received

Cash Flows from Investing (CFI)

Cash flow from investing shows the investment policy of a company. It could be the cash either raised from the sale of long-term assets or spent on capital expenses or other forms of investment.

A few items that could be classified as CFI are:

Cash Flows from Financing (CFF)

Cash flow from financing involves keeping track of the movement of cash from the firm’s financial activities. It could be the inflow of cash from investors and outflow of cash to shareholders in the form of dividends as the company produces income.

A few items also that could be classified as CFFs are:

  • Stock repurchase
  • Dividends

How To Categorize Cash Flows

The importance of CF can’t be overemphasized. And so, will look at the different categories of cash flows with examples.

Example of CFO

Here is an illustration for a better understanding of a CFO. It’s expressed as:

Operation Funds = (Net income + depletion, amortization, depreciation + deferred investment or tax + other funds)

Here are the cash flow details of a leading media company E! for the fiscal year October 2020. E! had a net income of $73.23 billion, amortization, depletion, and depreciation of $15.28 billion, a deferred tax of -$37.29 billion, and other funds of $ 5.8 billion.

Using the formula we have above, we could calculate the operational funds of the company. Adding up all the values we were given, it’ll be expressed as:

CFO = [$73.23 + $15.28 + (-$37.29) + $5.8]

Therefore, the cash flow from operations for E! as of October 2020 is $57.02 billion.

Example of CFI

The image below refers to Apple’s company report published on June 29, 2019.

This image shows the operating, financial, and investing activities of Apple company in the middle. The negative cash flow marked with red includes:

  • The expenditure made for a curing property, land, and plants
  • The expenditures made for purchasing non- sellable securities
  • The expenditure made for sellable security

While the positive cash flow marked in green are:

  • The profits made from sold securities
  • The profits made from matured securities

Example of CFF

CFF = cash flow from issuing equity or debt – (cash paid as dividend + repurchase of equity and debt) 

To know the CFF of a company, first

  • Add all the cash inflows from debts or equity
  • Then, add cash outflows from dividends, stocks, and repayment of debt
  • Then you subtract the cash outflow from the cash inflow to get the cash flow

Let’s assume this is the financial activities of a company

  • Revenues from long-term debt: $4 million
  • Stock repurchase: $2 million
  • Long-term debt repaid: $400,000
  • Dividend Payment: $ 500,000

Then CFF will be calculated as:

CFF = $4,000,000 – ($2,000,000 + $400,000 + $500,000)

This means that the CFF of that company = $1.9 million

Debt Ratio 

The debt ratio is used to calculate the cash flows of businesses or companies by comparing their cumulative cash flow to their total due debt. It’s also used to check the debt-paying capacity and financial health of a company.

How To Calculate Debt Service Coverage Ratio

The debt service coverage ratio shows if a company has sufficient income to pay up its debts. It’s expressed as:

DSCR = Net operating income / Total debt service


Net operating income = Revenue – certain operating expenses

Total debt service = current debt obligation.

Here’s an illustration:

Assume a company had revenue of $2 million and made some expenses worth $200,000. But they owe another company $400,000 worth of assets. Their DSCR will be calculated as:

DSCR = ($2 million – $200,000) / $400,00

 = $1,800,00 / $400,000. 

= $4.5

This illustration meant that the company has enough funds to pay its debts.

What Does a High Debt Coverage Ratio Mean?

A high debt coverage ratio simply means a company has more funds to clear its debts. If a company generates a DSCR ratio of 1 and above, it means they have just enough funds to clear their debts.

However, if their DSCR ratio is 2 and above, then it’s regarded as an ideal DSCR. And so from the illustration above, we can say the company involved generated more income enough to clear its debts.

Free Cash Flows

Free cash flow (FCF) is a means of monitoring a business cash flow to know what funds are accessible for dispersion among the stakeholders of a firm.

It’s also the amount of money a business is left with after all expenses needed to continue its operations and retain its capital is paid. To make key business decisions, most businesses need to steadily calculate their free cash flow.

This is because an accurate FCF tells you as a business owner if you’re ready to invest in strategies to minimize operating costs or expand your business. However, it’s important to investors as it helps them check for account fraud and how much money could be allocated in the form of share or dividend payments. 

Free Cash Flows to Equity (FCFE)

Free cash flow to equity is the optional cash flow of an organization that’s accessible only to its equity holders. This is the cash flow left after meeting and exceeding all capital and financial requirements. 

However, while computing the funds, interest payments and debt repayment are often put into consideration. And so, analysts use the FCFE to determine a company’s value and how much money an investor gets with the equity he has from that organization.

How To Calculate FCFE

Since we know the FCFE is the money left for only the equity shareholders of a company, here’s how it’s calculated.

FCFE = Cash flow from operations – Fixed capital expenses + Net debt fees (Repaid)

For instance:

Assume  as company’s cash flow from operations is worth $1 million with a fixed expense of $300,000 and a debt fee of $200,000 their free cash flow to equity becomes:

FCFE = $1,000,000 – $500,000

= $500,000.

This means that $500,000 of the company’s assets is available to share with its equity holders.

What Is a Good FCFE?

A good FCFE is when a company has enough funds or assets to share among its equity holders. A good FCFE should be about 5% of a company’s assets. If it’s lower than that, then it may not be regarded as a good enough FCFE.

Free Cash Flows to Firm (FCFF)

Free cash flow to firms is the cash flow available for optional distribution to the investors of a company. It could either be in equity or debt, after paying for capital expenses and cash operating expenditures.

In contrast to FCFE, interest payments are not entirely taken into consideration while computing FCFF and so this measure can somewhat be termed as an unlevered cash flow. FCFF tells people or investors how much cash they can earn from a firm.

How to Calculate FCFF

FCFF is used to calculate the amount accessible to both equity holders and debts. It’s expressed as:

FCFF = Capital expenses + working capital – product of earnings before tax and interest

An illustration:

A firm’s financial statement for the fiscal year September 2018. If that firm has a working capital of $450,000, a capital expense of $350,000, and a product earning of $300,000. The FCFF of the firm becomes:

FCFF = $350,000 + $450,000 – $300,000

= $ 500,000

This means that the firm has cash or assets to pay its debts and equity holders.

What Is a Good FCFF?

A good FCFF means a company can cover its short-term liabilities and still has incomes left. Investors and analysts regard a good FCFF ratio as 1.0 or more. Anything lesser than that is regarded as a low FCFF.

Unlevered Free Cash Flows

Unlevered free cash flow is the cash flow of a company before interest payments are made to its investors or shareholders. It also shows how much cash is made available to a firm before taking financial responsibilities into account.

How to Calculate Unlevered Free Cash Flows

Here is how an unlevered free cash flow is calculated.

Unlevered free cash flow = Earnings – capital expenses – operating capital – tax fees.

Why Is Unlevered Free Cash Flows Important?

An unlevered free cash flow is important because it’s used to reduce the effect of capital structure on the value of a firm when comparing it with other firms

What Is the Price-to-Cash-Flows Ratio Used For?

The price-to-cash-flow ratio is a stock validation pointer that measures the value of the CFO. It compares the market value of a company to its stock price or operating cash. The price-to-cash ratio is best for companies with huge non-cash expenses such as depreciation.

Revenues vs Cash Flows

Revenue is the money generated from the product sales and services of a company. It also measures how effective a company’s sales and marketing have been. While cash flow on the other hand is the total amount of cash moving in and out of a company. In short, a cash flow is a better liquidity indicator.

Getting Help Understanding Cash Flows

For every business, either startups or thriving businesses, you must keep track of your statement of cash flow. It’ll help you keep track of the financial operations of your company.

However, if you’re in doubt as to how to get a statement of cash flow, then you could consult a financial advisor. They’ll help you monitor your cash flow as a company to prevent you from running into debts.