cash flow

Definition:
The identification of the movement of ASSETS, liabilities and capital during a period of time, and the resultant effect on cash. The ACCOUNTING for receipts and expenditures. The physical flow of money in and out of the organization. Cash flow is as important to a company as profitability, especially in periods of rapid expansion or high rates of inflation. In a rapidly growing company, the company may make good profits, but have a poor cash flow position because the profits generated are insufficient to cover the even larger increase in STOCK, debtors and capital expenditure caused by the rapid expansion resulting in the firm over-trading and getting into liquidity problems (lack of cash to pay immediate bills). In periods of high inflation the cash generated by a company is absorbed in the repurchase of higher-priced stock. For example, a wine merchant buys stock at 6 ecu and sells it for 9 ecu giving a profit of 50 per cent. However, in periods of high inflation, to repurchase the stock, the merchant has to pay 9 ecu, thus the cash generated by the profit is absorbed by the higher price of stock and the cash flow position is under threat.

Cross-References:
[stock] [accounting] [assets]

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