Finance Weblog: CASH FLOW: WHAT CASH FLOW? - Instituto de Empresa Business School

Noviembre 25, 2008

CASH FLOW: WHAT CASH FLOW?

Francisco Lopez Lubian

Now that everyone is looking for liquidity, generation of cash flow is a key issue for any company. But, what cash flow are we talking about? Where does this cash flow come from? What can any manager do to generate cash flow?
As a Chinese proverb says: ” Wisdom begins by calling things by their right name”. So, let me try to clarify some ideas on cash flow:
• Do not limit the generation of cash flow to the cash flow coming from the operational aspects related to the short term activities included in the Income Statement.

• This necessarily happens when the management is only P&L oriented, forgetting the needed resources and their finance.

• There are five major sources of cash flow in any company:

1. Cash flow from operations coming from activities reflected in the P&L
2. Cash flow from operations coming from management of the working capital
3. Cash flow from Capex decisions
4. Cash flow from shareholders retribution decisions and internal finance
5. Cash flow from external finance with cost (financial entities)

• These five major sources of cash flow can be presented in different ways and in different formats. When dealing with short term analysis and focusing in economic feasibility, a very useful presentation is the so called Net Cash Flow

• Free Cash Flow is commonly used to analyze economic value in a long term approach.

• To estimate or analyze economic feasibility, use Net Cash Flow. To estimate economic value, use Free Cash Flow.

Exhibit shows the differences between Net and Free Cash Flow.

Posted on 25 Noviembre 2008

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