What is Cash Flow?

Cash flow is “the net amount of money/cash flowing/moving into and out of a particular business in a certain period”.

Example

Say Mr. Amar owns a textile industry.

Cash Inflow includes the investment from his own pocket or a loan from a lender or from shares and equities or even from the profits from previous selling’s.

Cash Outflow includes his expenses or the salaries to be paid to employees or repayment of loans. So, the “net cash flows includes cash inflow minus cash outflow”.

What does Cash flow mean to a company?

If the net cash flows are in positive sign then it implies the company is having more liquidity and has the ability to repay loans, increase the business, and pay salaries in time.

If the net cash flows are in negative sign then it implies the company is not unable to pay salaries and debts and considered to be insolvent.

Why cash flow is misleading?

The net cash flow is not a very good measure of companies performance because, a positive cash flow doesn’t always means a company is in profit because the cash inflow may be from huge debts from banks which have to be paid with interests. And similarly a high profit usually doesn’t mean high cash flow.