The Cash Flow

Finance and investment is the study of cash (money) and equivalent and the reward (return) for

the best use of available fund. Therefore, finance primarily focus on the study of time value of

money. This is also because finance providers/investors value cash flow rather than profit or loss.

Discounting and compounding are simple tools used to define time value of money.

The time value of money is a fundamental concept in finance and it influences every financial

decision made. Time value of money reflects the idea that money available at the present time is

worth more than the same amount in the future due to its potential earning capacity. This core

principle of finance holds that, provided money can earn interest, any amount of money is worth

more the sooner it is received.

Finance and investment is the study of cash (money) and equivalent and the reward (return) for the best use of available fund. Therefore, finance primarily focus on the study of time value of money. This is also because finance providers/investors value cash flow rather than profit or loss. Discounting and compounding are simple tools used to define time value of money.

The time value of money is a fundamental concept in finance and it influences every financial decision made. Time value of money reflects the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.

Interest is the compensation for investors being deprived of using their money. Interest rate fluctuates over time. Generally, higher the period higher will be interest rate. Therefore, bonds in same class with different maturity have different interest rates. Two different nations can have significantly different interest rates in practice. Two different financial institutions within same jurisdiction can also have marginal different interest rates.

The purchasing power of money deteriorates over time. General index provides an estimation of the depletion of money value over time. There are specific indices too. They define devaluation of money in specific sectors or the depletion of money value with respect to specific product.

Investors love to hold money for different reasons. This character of investors is known as liquidity preference. Investors need to hold money for future unavoidable transaction, precautionary motive and speculation in a hope to earn a higher return. Being deprived of these opportunity investors demand higher return for their investment.

Once a suitable rate for investment/financing is defined, it is used for discounting and compounding the cash flows. Discounting is the process of converting future cash flows to present time whereas compounding means converting cash flows to certain future time both using the defined rate of interest.

The cash flow reflects the availability of money at particular time in past, present and future. Therefore, finance is coherently linked with the cash flow statement. Investors and financiers takes their decision based on the future cash position of the firm. However, for every projection uncertainty exists.