Cashflow simply defined is the amount of cash inflows contrasted with cash outflows.
Not all cash in/out is equal. Hence the need for a cashflow statement to indicate the differences.
Unlike the Income Statement, a Cashflow Statement takes into account cash earned or spent on activities related to the balance sheet, i.e. purchasing or selling assets and/or liabilities, which the Income Statement does not. The Cashflow Statement links the cash position between the Balance Sheet and Income Statement. The Income Statement is linked to a person’s cashflow statement via the summation of cashflow from what is called Operating Activities. The Balance Sheet is linked to the cashflow statement via the summation of cashflow from what is called Investing Activities (Assets) and Financing Activities (Liabilities).
Cashflow statements are typically used under an accrual accounting system, and an indirect cashflow calculation, for corporations. When applied to to an individual, cashflow is calculated on a direct calculation method, since an individual operates on a the equivalence to a cash accounting basis.
Cashflow = Beginning Cash Position ⇒ Cash from Operating Activities + Cash from Investing Activities + Cash from Financing ⇒ Ending Cash Position Delta
Beginning Cash Position = Current Balance of all currencies
Operating Activities = Income & Expenses Pillars (Net Profit/Burn - from Income Statement)
Investing Activities = Assets Pillar (Buy/Sell Assets)
Financing Activities = Liabilities Pillar (Mostly borrowing for individuals, or some lending).
Ending Cash Position Delta = Cashflow
The Cashflow Statement bridges the gap between the Balance Sheet and the Income Statement:
What does all this mean on a personal level?
There are one of three cashflow patterns an individual can operate in.
3. Active Cashflow: Salaried individuals who receive an income after taxes from an employer and spend it on their needs and wants. i.e. income & expenses.
2. Active Hybrid Cashflow: Salaried individuals who receive an income after taxes from an employer and spend it on their needs and wants. i.e. income & expenses. As well as on liabilities and hopefully some assets. These individuals can also be hybrids between active and passive cashflow, but most are not, typically this pattern is emphasized on liabilities as opposed to assets.
1. Passive Cashflow: Entrepreneurs & Investors who receive an income/s before tax from an asset/s, invest in assets, liabilities, expenses, and pay taxes on the remainder (Cashflow, Rental Income, Dividends, Debt Conversion, Appreciation/Capital Gains, and Residual Income from Businesses and Royalties.) - As mentioned in the Equity section of the framework, when one invests, one looks primarily for an investment to be productive (i.e. generate regular returns). Furthermore, as the market value of the investment grows, so does the equity value of the investment, which can eventually be sold for a much higher price than purchased (this act by definition is speculative). When one generates their income from an investment, looking to maximize dividends and appreciation, one de-couples income from time.
If one falls into cashflow pattern #3, then there is no need for a cashflow statement, since the income statement acts as one. However, if one falls into pattern #2, the cashflow statement is absolutely necessary in order to manage cash. And if one falls into pattern #1, then the cashflow statement is absolutely essential.
Accounting: Cash Vs. Accrual - https://bench.co/blog/accounting/cash-vs-accrual-accounting/