Positive and Negative Cash Flows
Positive and Negative Cash Flows
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When money flows into your account, we call it a positive cash flow. On the contrary, if money flows out of your account, we call it a negative cash flow.
Cash flows can be additive only if they happen at the same time. For example, if today you received a paycheck of $1,000, and you also had a great meal which cost you $50, then your total cash flow for today is: $1000 + (-$50) = $950.
Cash flows that occur at different points in time cannot be added directly (they have to be adjusted with the Time Value). We will talk about it in the later sections of this chapter.
Cash Flow Timeline Chart
In reality, you will often see multiple cash flows come at different times. Huh, that sounds messy, doesn't it?
One extremely helpful tool is the cash flow timeline chart, which depicts each cash flow's timing and amount in the time order. It makes the analysis of cash flows so much easier.
The following is an example of 3 monthly cash flows for your hypothetical account. The first $50 comes at the end of month 1; the second comes at the end of month 2, which is -100, meaning you are losing 100 at that time; and the third comes at the end of month 4.
With this tool, you can clearly see how much each cash flow is, whether it is positive or negative, and when do they occur on the timeline.
Now experiment with it yourself.
Below is an interactive chart. Move the 3 dots on the left panel to choose your 3 cash flows (value between -5 to 5) and the chart will automatically show your CFs in the timeline.
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