Cash flow definition

Cash flow is the net amount of cash that an entity receives and disburses during a period of time. A positive level of cash flow must be maintained for an entity to remain in business. The time period over which cash flow is tracked is usually a standard reporting period, such as a month, quarter, or year. Cash inflows come from the following sources:

  • Operations. This is cash paid by customers for services or goods provided by the entity.
  • Financing activities. An example is debt incurred by the entity.
  • Investment activities. An example is the gain on invested funds.

Cash outflows originate with the following sources:

An alternative way to calculate the cash flow of an entity is to add back all non-cash expenses (such as depreciation and amortization) to its net after-tax profit, though this approach only approximates actual cash flows.

Cash flow is not the same as the profit or loss recorded by a company under the accrual basis of accounting, since accruals for revenues and expenses, as well as for the delayed recognition of cash already received, can cause differences from cash flow.

A persistent, ongoing negative cash flow based on operational cash flows should be a cause of serious concern to the business owner, since it means that the business will require an additional infusion of funds to avoid bankruptcy.

A summary of the cash flows of an entity is formalized within the statement of cash flows, which is a required part of the financial statements under both the GAAP and IFRS accounting frameworks.

Related Courses

The Statement of Cash Flows