Cash flow is for us the best leading indicator of the success of a business or a personal balance sheet. Cash flow math is simple, revenue (income) minus outflow (expense) equals cash flow. This amount in surplus to outflow allows for you to invest further, raising you cash flow further in a virtuous cycle, or you can further pay down debt lowing the debt service requirement. At its root, cash flow is the leading indicator for value creation for the business or in your personal balance sheet.
Essentials of Cashflow:
- Positive cash flow indicates that a person has excess cash, allowing them to reinvest in the more cash flow generating investment, or you further satisfy the debt service.
- Cash flow generally comes in two ways for individuals: Income or Investment
- Cash flow generally comes in three ways for companies:
- 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 accounting for cash outflows to support operations and maintain its capital assets.