What is the meaning of Cash Flow?
Cash flow refers to the cash or cash-equivalent received or paid by the company as payment to its creditors. It is analyzed to determine and analyse the liquidity position of the company. It gives a clear picture of the total incoming cash and the amount going out of the business. It can thus be either positive or negative. It is computed by subtracting the opening balance i.e. balance at the start from the closing balance i.e. balance at the end.
Positive values mean there is more cash at the end of the period as compared to the opening balance. Cash flow statements are thus prepared to determine where the cash is coming and going. There are three categories of cash flow:
- Operating Cash Flow: This is comprised of day-to-day expansions.
- Investing Cash Flow: This is comprised of transactions which are done for the purpose of expansion.
- Financing Cash Flow: This is comprised of the transactions which are related to the dividend paid to the shareholders of the firm.