Cash flow

Cash flow (현금흐름) is the movement of money in and out of a business or project. It is usually measured during a specified, finite period of time. Cash flow can be used for calculating parameters:
 * to determine a project's rate of return. The time of cash flows into and out of projects are used as inputs in financial models such as internal rate of return and net present value.
 * to determine problems with a business's liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash even while profitable.
 * as an alternative measure of a business's profits when it is believed that accrual accounting concepts do not represent economic realities. For example, a company may be notionally profitable but generating little operational cash. In such a case, the company may be deriving additional operating cash by issuing shares or raising additional debt finance.
 * cash flow can be used to evaluate the 'quality' of income generated by accrual accounting. When net income is composed of large non-cash items it is considered low quality.
 * to evaluate the risks within a financial product, e.g. matching cash requirements, evaluating default risk, re-investment requirements, etc.

Weathering the IMF Crisis, Korean businessess became to understand the importance of cash flow.

Key words
cash flow, financial statements, structured financing

Use of Cash flow
Cash flow is a generic term used differently depending on the context. It may be defined by users for their own purposes. It can refer to actual past flows or projected future flows. It can refer to the total of all flows involved or a subset of those flows. Subset terms include net cash flow, operating cash flow and free cash flow. As for some exemplary cases, refer to the Cash flow (case).

Statement of Cash flow
The (total) net cash flow of a company over a period is equal to the change in cash balance over this period: positive if the cash balance increases (more cash becomes available), negative if the cash balance decreases. The total net cash flow is the sum of cash flows that are classified in three areas:
 * 1) Operational cash flows: Cash received or expended as a result of the company's internal business activities. It includes cash earnings plus changes to working capital. Over the medium term this must be net positive if the company is to remain solvent.
 * 2) Investment cash flows: Cash received from the sale of long-life assets, or spent on capital expenditure (investments, acquisitions and long-life assets).
 * 3) Financing cash flows: Cash received from the issue of debt and equity, or paid out as dividends, share repurchases or debt repayments.

Ways to augment Cash flow
Wikipedia explains common methods how to augment cash flows:
 * Sales - Sell the receivables to a factor for instant cash. (leading)
 * Inventory - Don't pay your suppliers for an additional few weeks at period end. (lagging)
 * Sales Commissions - Management can form a separate (but unrelated) company and act as its agent. The book of business can then be purchased quarterly as an investment.
 * Wages - Remunerate with stock options.
 * Maintenance - Contract with the predecessor company that you prepay five years worth for them to continue doing the work.
 * Equipment Leases - Buy it.
 * Rent - Buy the property for sale and lease back.
 * Research & Development - Wait for the product to be proven by a start-up lab; then buy the lab.
 * Consulting Fees - Pay in shares from treasury since usually to related parties.
 * Interest - Issue convertible debt where the conversion rate changes with the unpaid interest.

Cash flows as collateral
In structured financing, cash flows are regarded in a different way as a kind of collateral. Traditionally a security right shall mean the right in rem over a specific property so as to recover creditor's claims, and should notify the public of its existence and priority. Accordingly a general mortgage could not be created over whole properties of the debtor. There is an exception of the fiduciary transfer of movables on a limited basis. Several privileged claims are established by special laws without any notification. The fiduciary transfer of movables takes place in a manner of creating a security right without any explicit notice.

In the 1990s, there took place a paradigm shift in collateralization.

For instance, asset-backed securitization (ABS) is widely felt to function as collateral. In other words, when an originator transfers a pool of assets to a special purpose vehicle (SPV), investors of the bonds or investment certificates issued by the SPV could be satisfied by cash flows and total values of the separated, or bankruptcy-remote, assets. The object covers any asset that could generate comparatively stable cash flows in nature, for example, commercial buildings, personal properties, account receivables, trade receivables, and so on. Thus financial institutions and business entities are able to securitize their assets including distressed loan portfolios and real estate backlogs at a competitive cost.

The similar structure is being applied to project finance in which a project company, i.e., SPV, is established for the purpose of off-balance sheet financing. Revenue-generating assets of the project will be set aside for the repayment to project financiers. Project financiers shall maintain security rights over the assets related with the project, not because they want to dispose of such assets, but because they should prevent third parties from intervening in the project as security holders.