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Understanding cash flow

Cash flow is the amount of cash generated from all sources within a specific period of time. Cash can be generated by the following:

• from operations
• from owners’ equity
• from loans
• from investing
• from one-time activity such as an asset sale

A cash rich company does not mean it is a highly profitable company or its future earning growth is secured.

Cash flow and Profit is not the same. Cash flow is the money that flows in and out of the firm from operations, financing activities, and investing activities. Profit, also called net income, is what remains from sales revenue after all the firm’s expenses are subtracted. Companies can make a profit but still have a negative cash flow and not be able to pay its financial obligation and soon run into serious troubles when more of their creditors becoming worry and demand debts settlement and more suppliers demand cash settlement upon delivery. Read more…