ESSpanish ENEnglish CACatalan

Banco Santander
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ESSpanish ENEnglish CACatalan

What is cashflow?

Cashflow is a concept that explains the incoming and outgoing flows of cash in a company in a given period. It is an indicator that shows a company's liquidity.

The cashflow is calculated by adding the net profit of the depreciations and provisions. It is done this way because both the depreciations (permanent depreciation of an asset due to wear and tear) and the provisions (occasional depreciation due to an unforeseen event) do not imply a physical outgoing of cash, but rather an accounting expense note. As such, the cashflow is used to calculate the cash that a company can generate in a specific time, and therefore measure that company's capacity to make its payments.

Types of cashflow

Cashflows can be classified in three types:

Operating cashflow: This is the flow of cash that enters and leaves the company in relation to its activity. This covers cashflows from sales revenue from products or service provisions, payments to suppliers and payroll...

Investment activity cashflow: this is the cashflow related to investments made by the company, such as the purchase of machinery, property investments, acquisitions, etc.

Financing activity cashflow: this is the cashflow that is generated as a result of financial activities, such as the payment of loans, the payment of dividends, the issuance of shares, etc.

Therefore, the cashflow helps to learn the status of a company, whether it has liquidity problems even though it is profitable, or whether it is solid and has capacity to pay its debts.

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