What is cash flow

Very loosely, cash flow is the increase in cash over some reporting period, which will usually be a quarter, half-year, or year. There are three principal components to cash flow: (a) cash flow generated or consumed by operations, (b) cash flow associated with capital spending. Clearly if a company trumpets an increase in its cash flow and that increase turns out to have come from issuing shares or taking out a loan, a very different improved operational position. Similarly, if the cash flow worsens because of capital expenditure that should generate greater future income, then due account of those improved prospects needs to be taken before reading too much into the reduced figure. Cash flow from operational activities is what many companies refer to as “cash flow” and it can sometimes be used as a surrogate for gross income, but first, deductions must be made for the replacement of worn-out plant. It is useful to compare gross profit with cash flow from operational activities. If gross profit exceeds this component of cash flow, then sensors should be on full alert for creative accounting since profits are much easier to massage than cash flow from operational activities.

Source: Pattern Recognition and Trading Decisions, by Chris Satchwell

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What is cash flow