The cash flow or cash flow, is the amount of money that moves in and out of a business. In other words, it is the detailed presentation of the different cash inflows and outflows that a company may have in a given period of time.
It is the organization's ability to generate money or resources regardless of the type of financing structure it has.
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It is also defined as the perfect indicator of the liquidity that an organization has and that allows the preparation of its account statement.
The cash flow presents a statement of account that shows the amount of cash that remains in the company after to remove expenses, bank interest and capital payments, among other aspects to take into account bill.
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In this article you will find:
Cash flow profit
Cash flow is a very important tool in business management. Well, it allows to know and determine exactly the activities of the company. In addition, it provides us with valuable information about the different movements of cash and the operations that are carried out with it.
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Cash flow also allows us to:
- Objectively know the capacity and financial health of the company.
- Know the operation of the company and its evolution.
- Determine if we are able to meet payment targets.
- Measure the cash flow of the business by relating the inflows and outflows of cash.
- Specify some aspects such as, for example, studying the viability of an investment, determining liquidity problems or measuring the profitability of the company.
- Decide if it is necessary to request financing or, on the contrary, the cash flow is sufficient to meet the commitments.
Elements of cash flow
The cash flow of any project is made up of four basic elements. Namely:
- The initial expenses of the funds, that is, the investment.
- The income and expenses of the operation (liquid, future and differentiable or avoidable)
- The moment those flows occur.
- The courage to scrap or save the project.
Cash flow classification
There are different types of cash flow that stand out when trying to respond to some situations that we find in the economic management of a company.
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Depending on their origin, on the operational (product of investments or divestments) or on that originating from financial operations, different types of answers will be obtained.
Financing cash flow:
This type of flow is made up of the money that we enter through the issuance of shares or debts or the expenses that have had to be made for dividend payments to shareholders.
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It is also the cash received from the issuance of shares or debt less the cash paid as dividends and re-acquisition of debts.
Investment Cash Flow:
This type of flow has to do with the investments made by the company. The collections they have on non-ordinary assets are reflected here, as well as the payments that must be made for them.
In other words, it can also be said that it is the money that comes in and goes out for an investment.
Operating cash flow:
It has to do with the commercial activity of the company. This includes income from sales and expenses from payments to suppliers.
This type of flow reflects the money that enters and leaves the company for operating expenses or commercial activity.
Importance of cash flow
Cash flow is the mathematical representation of the difference, in a given period of time, between collections (sales, interest on loans, rentals and debt collection), and payments (taxes, bills and debt repayments), among others.
Information based on cash flow is what allows us to prepare periodic reports in order to make a real diagnosis of the financial health of the company. In addition, we can identify problems to try to solve them as soon as possible.
Another very valuable indicator in the financial activity of the company is what is known as the “net flow”. This results from the difference between receipts and payments. Well, in addition to measuring the liquidity of the entire company, it determines the viability of a business project.
If the balance of the net flow is positive, it means that the collections for the period have been greater than the payments for the period. On the contrary, if the balance is negative, the payments have been higher than the collections.
Cash flow and decision making
The survival of a company will basically depend on whether the flow that enters the company is greater than the flow that leaves. In a cash flow, the information is organized correctly and this allows to project cash flows for the future based on real and historical data.
As mentioned above, the power of cash flow lies in the fact that it constitutes a very good indicator to determine the liquidity of a company while giving us key information to answer questions such as following:
- How much merchandise do we need to acquire.
- How the purchase will be, in cash or in installments.
- We can use the excess money for investment.
- We can cancel outstanding debts on the agreed date or we must request a refinancing.
- Anticipate future deficits or surpluses.
- Support the request for credits.
- Measure the profitability of projects.
Cash flow is a scheme that shows in a systematic and organized way the costs and income recorded in each period. It is a key element to analyze a business proposal.
It is important that the assumptions or data on which each cash flow was prepared are known so that it can be understood by others.
It is also essential to bear in mind that liquidity, the main result of cash flow, is the vital part of any business and the most important indicator of the financial health of the company.
For that reason, you must manage your liquid assets very well because no company will survive without liquidity. The key to good cash flow management is planning taking into account all the aspects involved in a business economy.
