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What Is a Cash Flow Diagram?

Alex Newth
Alex Newth

Accountants, project managers and engineers trying to show how much money is coming in or out of a project typically use a cash flow diagram. A cash flow diagram is a picture or graph split into uniform parts, with each section representing a time period such as weeks, months or years. Arrows pointing toward or away from the diagram represent money either coming in or coming out of the project. This diagram helps planners know how much money is being spent on a project and what the potential profit will be from the project based on cash information.

The cash flow diagram itself is simple. It starts off as a horizontal line, with smaller vertical lines that represent sections of time. The time must be uniform, so the diagram cannot track months and then randomly begin tracking years. If the cash flow diagram is meant to track years, it will only show information based on years and no other measurement of time.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

Arrows are then placed on the line. There are two types of arrows: one that represents inflow, or money coming into the project, and one that represents outflow, or money coming from the project. When an arrow points away from the cash flow diagram, it means inflow, while an arrow pointing toward the line means outflow.

Inflow is any money that comes into the project. If there are any loans, this is considered inflow. Sales, if the project is making money, are considered inflow. Outflow is when money is spent or invested. Even if the money is going to make more money in the future, it is still considered an outflow.

Aside from costs, the cash flow diagram will also typically show any money that can be recouped at the end of the project. If the project requires tools, such as heavy machinery, the diagram will typically have an area that shows the resale value of the equipment and will display it as inflow. If there are any payment schedules, such as credit or loan payments, these will be recorded immediately on the cash flow diagram. This lets managers know where that money is going and that they cannot count on that money for the project.

Cash flow diagrams are typically coupled with other types of diagrams and sheets that track the overall balance and sales or profits. These are used to help managers understand how much money is left and how much is being spent. They also allow managers to know if the project is making money or if nothing is being made.

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