How can you interpret a company’s cash flow? Know the important indicators in corporate accounting!

In corporate accounting, “cash flow” is a very important concept. Besides focusing on the profitability of a company, management also needs to evaluate the company’s operation from various perspectives. In this article, we will introduce you the definition of cash flow, the categories of cash flow, and key terms/important indicators such as net cash flow and free cash flow.

Back to Tax Return Q&A List

Confident of getting to the hard part? See advanced tax examples and court case sharing

Table of Contents

What is cash flow?

What is “net cash flow” and “free cash flow”?

How should companies apply cash flow?

What is cash flow?

In corporate accounting, cash flow refers to the total amount of cash that comes in and goes out of a company over a certain period of time. Cash flow is usually divided into three categories: cash flow from operating activities, cash flow from investing activities and cash flow from financing activities.

Cash flow from operating activities:

Cash flow from operating activities refers to the cash flows received by a business through operating activities, such as cash received from the sale of goods or services.

Cash flows from investing activities:

Cash flows from investing activities are cash flows received from investing activities, such as the sale or purchase of fixed assets, stock or other investments.

Cash flows from financing activities:

Cash flows from financing activities are cash flows received from financing activities, such as issuing stocks or bonds, or obtaining loans from banks.

What are “net cash flow” and “free cash flow”?

When analyzing the cash flow of a company, we also need to understand the concepts of Net Cash Flow and Free Cash Flow.

Net Cash Flow

Net cash flow is the difference between the cash flow from operating activities and the cash flow from investing and financing activities over a certain period of time. If the net cash flow is positive, it means that the company has more cash income than expenses, which can be used to invest or pay debts. If the net cash flow is negative, it means that the company has more cash to spend than to earn and may need to finance its operations.

Free Cash Flow

Free cash flow is the amount of cash available for investment or debt repayment within a certain period of time. Free cash flow is usually defined as net cash flow less capital expenditures of the business. If free cash flow is positive, it means that the company has enough cash to invest or repay its debts. If the free cash flow is negative, it means that the company needs to finance its operations.

The concept of free cash flow is important in assessing the financial position of a business because it reflects the true amount of cash available for investment or debt repayment. The greater the free cash flow of a business, the greater its sustainability and growth potential.

How should companies apply cash flow?

Understanding the definition and concept of cash flow is essential for business investment and financial analysis. By analyzing a company’s cash flow, it can help investors and analysts better understand the financial position of the company and the value of the investment.

If you are conducting business investment or financial analysis, the following points can be used as reference for your cash flow analysis:

Analyze the cash flow from operating activities to understand the sales revenue, accounts receivable and accounts payable of a business.

Analyze the cash flow of investing activities to understand the investment of the enterprise, such as fixed assets and investment in stocks, etc.

Analyze the cash flows from financing activities to understand the financing situation of the enterprise, such as stock issuance and debt issuance.

Calculate the net cash flow of the enterprise to understand the cash flow of the enterprise over a certain period of time.

Calculate the free cash flow of the enterprise to understand the real amount of cash available for investment or debt repayment. The above information is provided for reference. If you have any questions or inquiries about tax filing (personal tax return, corporate tax return, accountant tax return), you are welcome to contact our professional consultants and we will provide you with free quotation and consultation services later.