Cash flow

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Two distinct meanings in the financial markets, though they're related.

Asset cashflows

When talking about a financial instrument, its cashflows — usually plural — are the payment streams owed on that instrument: Principal, interest, dividends, distributions and so on. Of course, these payments come due over time and may be dependent on external factors[1]

Any asset cashflow is a series of payments due at defined points over a period of time. For example, once it has been advanced, a one-year loan of £10,000,000, bearing interest fixed at 10% per annum payable quarterly in arrear comprises the following payments:

  • Month 3: £250,000.
  • Month 6: £250,000.
  • Month 9: £250,000.
  • Month 12: £1,250,000.

The total amount payable over the year is 11,000,000, but the value of that cash flow at any time — its “present value” — is somewhat less than that, because you have to “discount” payments due in the future, as they are worth less than payments due now.

Company cash flow

When talking about a business, its “cash flow” — a singular, abstract noun — is the sum total of all its incomings, outgoings and bank balances. A company that is “cashflow positive”, over a given period, it takes in more money than it pays out. A company that is “cashflow negative” (also called, if big enough and filled with enough hot air, a “unicorn”) pays out more money in a given period than it takes in. If its financiers and stockholders are patient enough, — as Uber’s seem to be, for example — a company can stay cashflow negative longer than its short-sellers can stay solvent. But being cashflow negative means having cash in the bank to meet the monthly shortfall. If you have to borrow cash to meet the shortfall, your monthly shortfall is sure to get bigger each month. If you don’t, you soon will have to, if you don’t sort it out. A company which is cashflow negative and doesn’t have (and can’t raise) money to cover the shortfall, “cannot pay its debts as they fall due” and is “cashflow insolvent”. Not good. A company whose assets are worth more than its liabilities (that, from a balance-sheet perspective, is solvent) can nonetheless be cashflow insolvent. Lehman Brothers, for example.

See also


  1. For example: A floating rate obligation will depend on the published interest rate determined for each interest period; a fixed rate obligation is set at the beginning, and once set, doesn’t depend on anything.