Cash flow

Cash flow shows how much money actually flows through a company – as opposed to profit, which can be distorted by depreciation and provisions.

3 types of cash flow:

1. Operating cash flow:

Money from normal business operations (selling products, providing services). The most important cash flow – shows whether the core business is making money.

2. Investing cash flow:

Money for investments (buying machinery, building factories, acquiring companies). Usually negative – which is good, because it means growth.

3. Financing cash flow:

Money from loans, share issues, dividend payments. Shows how the company is financed.

Why cash flow is more important than profit:

• Profit: can be "shaped" through depreciation, provisions and valuations
• Cash flow: shows what REALLY lands in the account. "Cash is king"
• A company with high profits but negative cash flow can still go bust!

For private investors: free cash flow (operating cash flow minus investments) shows how much money is left for dividends, share buybacks and paying down debt.