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Cash

The lifeblood of business

What is Cash?

In finance and accounting, cash refers to money (currency) that is readily available for use. It may be kept in physical form, digital form, or invested in a short-term money market product. In economics, cash refers only to money that is in the physical form.

 

Cash is Money theme

 

Cash in Business Operations

Cash is the lifeblood of a business. For a company to cover its operating expenses it needs to have sufficient money on hand to pay its employees, contractors, vendors, and suppliers. Companies also need money to fund capital expenditures and invest in long term growth projects.

If companies don’t have enough cash on hand, they may finance their OpEx and CapEx by borrowing money (debt) or by issuing shares (equity).

 

Financial Modeling and Business Valuation

The intrinsic value of a business is generally considered to be the net present value (NPV) of all its future cash flows. After all, an investor purchases a company to make a return on investment (ROI), and the return comes in the form of cash. Learn more about financial modeling and valuation in CFI’s financial analyst courses.

 

Advanced Financial Model - AMZN Case Study

Image: CFI’s Advanced Amazon Financial Modeling Course

 

Cash in Financial Statements

Cash plays an important role in the financial statements of a company. On the balance sheet, it appears as the first item at the top, since it’s a company’s most liquid asset. Companies often include “cash equivalents” in this category, which are money market funds and other short term investments that are easily convertible into cash.

To reconcile the changes in amount over a period, accountants prepare a statement of cash flows, which shows all money that was generated and consumed by a business, ending with the net change in money at the bottom.

Below is an example of Amazon’s 2017 balance sheet, where you can see the amount recorded on the very first line of the statement.

 

Example of Cash on Amazon's Balance Sheet

 

Learn more in CFI’s Free Accounting Courses.

 

Money in Economics

In economics, the term refers to money in the physical form, which includes all types of legal tender, such as bills and coins. It is used as a reserve for making payments and is an important part of macroeconomic policies, including the money supply.

 

supply of money

 

Additional Resources

Thank you for this CFI guide. To help you prepare for a career as a world-class financial analyst, these additional CFI resources will be helpful:

  • Time Value of Money
  • Money Order
  • Hot Money
  • Fiat Money

Free Accounting Courses

Learn accounting fundamentals and how to read financial statements with CFI’s free online accounting classes.
These courses will give the confidence you need to perform world-class financial analyst work. Start now!

 

Building confidence in your accounting skills is easy with CFI courses! Enroll now for FREE to start advancing your career!