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Cash Flow Management

Cash flow is the net amount of cash and cash equivalents being transferred into and out of a business. Cash received represents inflows, while money spent represents outflows.

At a fundamental level, a company’s ability to create value for shareholders is determined by its ability to generate positive cash flows or, more specifically, maximize long-term free cash flow (FCF). FCF is the cash that a company generates from its normal business operations after subtracting any money spent on capital expenditures (CapEx).

Key Takeaways

  • Cash flows refer to the movements of money into and out of a business, typically categorized as cash flows from operations, investing, and financing.
  • Operating cash flow includes all cash generated by a company's main business activities. Investing cash flow includes all purchases of capital assets and investments in other business ventures.
  • Financing cash flow includes all proceeds gained from issuing debt and equity as well as payments made by the company.
  • Free cash flow, a measure commonly used by analysts to assess a company's profitability, represents the cash a company generates after costs.