In this post we will know what is CASH FLOW?
Types of CASH FLOW?
As well as
The importance of CASH FLOW, and understand how to create a CASH FLOW STATEMENT?
So, Lets start
What is cash flow?
You can also call it the flow of money, the coming of wealth and going of wealth.
CASH FLOW is a financial term, and in fact CASH FLOW is a Statement.
Or You can use a cash flow statement to answer the questions, “where did the money come from?” “Where did it go?”
“A cash flow statement is a report of how much cash is flowing into and out of your business for a specified time period. In order to remain in business, you must have a positive level of cash flow.”
The question is ,
What is the type of money which is coming in the business and going out of the business ?
The answer is something like this:-
Money received from Customers and Clients, other Lending rest, Sale or Service of capital,
It is also called CASH generated from operation of business.
The money given to repay the Expenses of the Purchase, Rent, Interest, Tax, and any other business for the purchase or purchase of goods.
What are the Types of CASH FLOW?
Cash flow are classified as Operating, Investing and Financing activities.
On the statement of Cash Flows, depending on the Nature of the transaction.
Each of these three classification is defined as follows:-
The first section of the cash flow statement illustrates the cash received and used during normal operating activities. This section details the changes in the ledger account balances for your current assets and current liabilities.
These accounts are your accounts payable, accounts receivable, prepaid insurance and unearned revenues.
When you sell products or services, that activity is reported here.
Following are some of the examples of cash flows from operating activities:-
– Cash receipts from sale of goods and rendering of services (cash inflow)
– Cash receipts from commission, royalties, fees and other revenues (cash inflow)
– Cash refunds of income taxes if they cannot be specifically identified with financing or investing activities (cash inflow)
– Cash payments to suppliers for goods and services (cash outflow)
– Cash payments to and on behalf of employees (cash outflow)
– Cash payments of income taxes if they cannot be specifically identified with financing or investing activities (cash outflow)
The second section is dedicated to investment activity.
All of a company’s investments are listed under this category.
Any Purchase or Sale of Property, Equipment and Plants also qualify under the investment section.
The ledger accounts to review for this section include the long-term investments account, vehicles, capital equipment accounts, land and buildings.
If you run a cafe or restaurant, buying a new grill or oven would qualify under this section.
Report any equipment you buy for your regular business operations here.
Following are some of the examples of cash flows from investing activities:-
– Cash receipts from disposal of fixed assets (cash inflow)
– Cash receipts from the sale of shares and debt instruments of other companies (cash inflow)
– cash receipts of dividend and interest (cash inflow)
– Cash receipts from the repayment of loans and advances made to other parties (cash inflow)
– Cash payments to acquire or construct fixed assets (cash outflow)
– Cash payments to purchase shares and debt instruments of other companies (cash outflow)
– Cash payments in the form of loans and advances made to other parties (cash outflow)
The third section of the cash flow statement lists the information for the company’s financing activities.
Financing activities include purchases of bonds and stock as well as dividend payments.
Some of the applicable ledger accounts include your capital equipment and paid-in capital accounts, notes and bonds payable, stock and retained earnings.
For a small business, one of the most common financing activities for this section is from the Small Business Administration.
If you secured an SBA loan to help you establish or grow your business, that loan should be reported here.
Following are some of the examples of cash flows from financing activities:-
– Cash proceeds from issuing shares and other equity instruments (cash inflow)
– Cash proceeds from issuing debt instruments such as debentures and bonds
– Cash proceeds from issuing preference shares (cash inflow)
– Cash receipts from borrowings (cash inflow)
– Cash payments to redeem debt instruments such as debentures and bonds (cash outflow)
– Cash payments to redeem preference shares (cash outflow)
– Cash payments to repay borrowings (cash outflow)
– Cash payments of dividend and interest (cash outflow)
The importance of CASH FLOW
It is very important to have Positive Cash Flow for a common man, a small company and a bigger company for its business.
You can understand the importance of cash flow in such a way that even after spending all the necessary expenses.
If we still have our pocket money, then we are naturally feel good, and stay confident, and a positive attitude towards the future lives.
In the same way, Positive Cash Flow in a business indicates that the expenses of business are Low and income is High
And in such a scenario
Business is successful in earning more profits.
There is a lot of money problems faced in small and new businesses
Most new businesses or companies do not have cash reserve funds, and as soon as there is a financial crisis, most small businesses or companies Come to the verge of closure.
How to make CASH FLOW STATEMENT:-
The Cash Flow Statement can be prepared either by Direct Method Or Indirect Method.
Here are the Formats of Cash Flow Statement as follows:-
Let me first Show You the Direct Method
Cash Flow Statement as per AS-3(Direct Method)
For the year ended……………
A. Cash from Operating Activities
(+) Cash receipts from customers
Cash flows before extraordinary items
Net cash flow from operating activities=
B. Cash flows from Investing Activities
(+) Sale of Fixed Assets
Net Cash flows from Investing activities=
C. Cash flows from Financing Activities
(+) Proceeds from issues of Shares
Net cash flows from Financing Activities=
A+B+C Net increase/decrease in cash
Cash at the beginning of period
So this is the Direct method or format of Cash Flow Statement as per the Account Standard(AS)-3
And now lets see the Indirect Method or Format.
Here it is……..
Cash Flow Statement as per AS-3(Indirect Method)
For the year ended……………
|(A) Cash Flow from Operating Activities
Net Profit as per Profit & Loss A/C or Difference between Closing balance of Profit & Loss A/C
Add: Transfer to Reserves
Add: Decrease in Current Assets
Less: Income Tax paid (Less refund if any)
Net Cash from/used in Operating activities (A)=
(B) Cash Flow From Investing Activities
(C) Cash Flow from Financing Activities
Net Increase/Decrease in Cash and Cash
Now you see the both format of cash flow statement by Direct and Indirect Method, you cash prepare your cash flow by using both Methods.
I personally recommend you to always go with the first one that is Direct Method of Cash flow Statement.
Because it is shorter then second one that is Indirect Method as also easy to remember as well as easily adoptable in any cases.
Some important points to be kept in your mind about the CASH FLOW STATEMENT:-
- Cash flow is a statement, which tells the pattern of the cash flow of an individual, organization or company.
- The Cash Flow Statement exposes the cash transaction performed by a business.
- In a business, the positive cash flow tells the strength of that business.
- Before investing, the company’s cash flow study is a part of fundamental analysis.
Cash Flow is one of the most important investment concepts to understand.
For the value investor it is more important than accounting profits because it paints an untainted or truer picture of the company and its finances.
Each one of the different cash flow metrics gives pertinent insight into the health of an entity.
By using the different types of cash flow for investment analysis you will be greatly improving your ability to analyze and compare investment opportunities.
Thanks for Reading this post
Hope it is Useful for you.