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Cash flow refers to the amounts of cash being received and spent by a business during a defined period of time, sometimes tied to a specific project. It can be used:
to determine problems with liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash, even while profitable.
to generate project rate of returns. The time of cash flows into and out of projects are inputs to models like internal rate of return and net present value.
to measure income or growth of a business when it is believed that accrual accounting rules do not represent economic realities. Alternately, the cash flow can be used to 'validate' the net income generated by accrual accounting. |
