What exactly does cash flow mean?

[Zebo]

From the dictionary:
cash flow
n.
The pattern of income and expenditures, as of a company or person, and the resulting availability of cash: The city improved its cash flow by borrowing against future revenues.
The cash receipts or net income from one or more assets for a given period, reckoned after taxes and other disbursements, and often used as a measure of corporate worth.


OK say we have a business with 100,000 in sales a year
lights, rent, employees cost 25,000
cost of goods sold cost 25,000
and income taxes are 10,000

What is that businesses cash flow during this period?

Edit o we need to add in charges off for depreciation, depletion, and amortization for our net income?

 

[FrustratedUser]

$40000

 

[BrunoPuntzJones]

You can't really get cash flow with those numbers...

Sales 100000
COGS -25000
=75000 Gross
Operating Expenses -25000
Operating Profit=50,000
Taxes -10000
=40,000 Profit

You take profit for the period and add back any depreciation. Then add or subtract your adjustments for accounts to get your cash flow. Taxes sometimes are and sometimes aren't figured in there, but what the hell. A lot of problems will just stop at operating profit. With taxes you can get into funny stuff like deferred tax assets/liabilities so it's just easier to forget about them unless you really wanna figure it out But, they are considered a liability so you really should subtract them out.

With just those numbers I would say a positive flow of 40,000. Not really the way I've seen it done though...

 

[apoppin]

<< lights, rent, employees cost 25,000 >>



A year? In what country?



For me, the definition of a cash "flow" is getting to the bank with enough money before the check I wrote arrives to clear.

 

[DaveSimmons]

Cash flow is income vs. expenses on a day-to-day (week-to-week...) basis vs. the annual amounts.

In many businesses the two don't match up during the year, for example the city the dictionary mentions might get a big pile of cash from property taxes once a year, but it has to pay salaries every two weeks. Many retailers make most of their money at Christmas, and are hurting for cash around July (wild guess).

For consultants cash flow is uneven and depends on how quickly their clients pay up -- they may have a huge amount owed to them but no cash on hand yet.

 

[Zebo]

<< You can't really get cash flow with those numbers...

Sales 100000
COGS -25000
=75000 Gross
Operating Expenses -25000
Operating Profit=50,000
Taxes -10000
=40,000 Profit

You take profit for the period and add back any depreciation. Then add or subtract your adjustments for accounts to get your cash flow. Taxes sometimes are and sometimes aren't figured in there, but what the hell. A lot of problems will just stop at operating profit. With taxes you can get into funny stuff like deferred tax assets/liabilities so it's just easier to forget about them unless you really wanna figure it out But, they are considered a liability so you really should subtract them out.

With just those numbers I would say a positive flow of 40,000. Not really the way I've seen it done though... >>



Could you please show me a proper way with hypothetical numbers for a business. Basically when I see business for sale adds they love to list cash flow WTF. It could mean many differnt things right? depending on what you count as adjustments for accounts, depreciation, and amortization.

Edit: And why is Cash Flow always listed for businesses for sale. I mean All I care about is how much net income will this venture generate vs. how much I had to borrow to get into it in the first place?

 

[Zebo]

A1 where are you when I need you?

 

[BrunoPuntzJones]

I'll just make up a super basic one. Let's say instead of a city you had a private bidness. Same numbers, but had changes in accounts receivable and accounts payable (most common, but could include inventory, prefered dividends, etc. anything that changes. stuff like bonds payable won't be included as it should be fixed throughout the life of the bond (unless callable, etc)).

------12/31/x1 12/31/x2
AR 5000 10000
AP 4000 3000

Depreciation for the year was 10,000


40,000+10,000 depreciation (added back as with depreciation was taken to arrive at net income, but no real cash ever left the firm)-10,000 (increase in AR)-1000 (decrease in AP)=39,000 positive cash flow

The increase in AR is taken out because you made sales that didn't generate cash. The money shown in net income (under sales) but you didn't physicaly receive the cash for it yet. Same goes for AP. You had expenses that you paid for (the decrease) so money left the company.

So you could have billions in sales and still not have a dime if they are all on account.

 

[Zebo]

Hey thanks..