What is Cash Flow and it’s Types ? What is Cash Flow Statement and analysis
The evaluation of a business is done based on its financial performance. The statement of changes in the financial position of a company is carried out in two ways :-
1. Working Capital Basis – Fund Flow Statement 2. Cash Basis – Cash Flow Statement
In this article, you will get to know about the cash flow.
What are Cash Flow and its types?
What is cash flow?
Cash flow is the amount that a company receives or gives out by way of payment. It is the amount of cash and cash equivalents that moves into and out of the business. It tells the liquidity position of the company.
It is calculated by subtracting the opening balance of cash from the closing balance of cash. It may be positive or negative cash flow.
A Positive cash flow indicates that there are more inflows of cash and cash equivalents into the business while negative cash flows indicate there are more outflows of cash and cash equivalents into the business.
Although, the level of cash flow does not always show a good picture of the business entity. An organization might have a positive cash flow because the company has sold any of its assets.
Hence, one should consider the balance sheet and income statement also for making a rational investment decision.
Types of cash flow :-
Cash flow from operating activity
The revenue generated to the company from its day-to-day activities is known as cash flow from operating activities. These are the principal revenue activities of the company.
It includes the sale and purchase of raw materials and other expenses which is incurred on a day-to-day basis.
Cash flow from investing activity
The revenue generated from assets, financial instruments, and the other investments made by the company not included in cash equivalents is known as cash flow from investing activity
It includes the purchase and sale of assets, investments made by the company, etc.
Cash flow from financing activity
The revenue generated from the change in the size of the owner’s capital and borrowings is known as cash flow from financing activities. It includes cash receipts from an issue of shares and debentures and payment of interest and dividends.
What is a cash flow statement?
The cash flow statement is the changes in the cash position of a company between the beginning and the end of the financial year. It shows the sources of cash inflow and outflow during a period. It may be prepared monthly or yearly.
Cash flow statement is the best tool to know about the liquidity position of a company.
How to calculate net cash flow?
Net cash flow is the difference between inflows and outflows of the amount of cash in the business
It is calculated by taking the aggregate of cash generated or cash used in the operating activity,
investing activity and, financing activity.
Net cash flow =
Cash flow from/used in operating activity
+ Cash flow from/used in investing activity
+ Cash flow from/ used in financing activity
Methods of preparing cash flow statement
There are two types of methods for preparing a cash flow statement
• Direct method
• Indirect method
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What is cash flow analysis?
The three types of business activities i.e. cash flow from operating activity, cash flow from investing activity, and cash flow from financing activity are used for cash flow analysis that from where the money came into the business and where the money goes out of the business.
It checks the financial health of an organization.
Utility of cash flow analysis
Cash flow analysis is an important tool for management. Analysis of cash inflow and outflow helps the business to make reliable projections of cash flow for the future.
The advantages of cash flow analysis are :-
Helps in the efficient management of cash – It helps in evaluating the financialpolicies and cash position of the firm. Hence, it helps management to plan policies efficiently.
Helps in internal financial management –
Cash flow analysis gives information regarding funds available from the operations. It helps management to ascertain policies for internal financial management.
Discloses cash movements – Cash flow analysis discloses the movement of cash during a period. It shows the net increase or decrease in the cash flow of an organization.
What is cash flow management?
Cash flow management is a process through which an organization controls, analyzes, and monitors the inflow and outflow of funds. A basic principle of cash flow management is to ensure that the business never runs out of cash.
According to a research, because of poor cash management, 82% of business fails. Therefore, a company needs to manage its cash flow efficiently.
A company needs to prepare a cash flow statement and analyze it accordingly. At the same time, cash flow management is also important to survive business in the long run.
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A successful business is decided through its cash flow statement. There are many ways by which you can increase your cash flow, you just need to look for an expert who can guide you in the correct manner.