Cash Flow Portal

Cash flow, in terms of business, is literally money coming in (called cash inflow) and money going out of business (called cash outflow). It’s the company’s flow of cash. Cash flow forms an essential part of finances, whether it is personal finance or a company’s finance. They are present in the form of records of past sales of products or can exist in the form of contemplated calculation of what will be spent or what will be gained in the future. As an analytical tool, cash flow statements are used in determining the short-term viability of a company, particularly its ability to pay bills and keep the cash flowing. It is therefore essential to a company’s survival. Paying the bills, ensuring that the creditors and employees are paid on time depends on the flow of cash into and out of any company. Insufficient funds in terms of hard cash means the business or person is likely to be closer to bankruptcy, if insolvency continues.

Synopsis of a Cash flow statement

Financial statements of most companies are reported on a quarterly or monthly basis.  The cash flow statement provides a logical understanding of the company’s financial stand and potential efficient functioning in terms of liquidity or solvency.

Components of a Cash Flow Statement

A cash flow statement has three parts that offer information on cash flow resulting from operating activities, investing activities, and financing activities.

Activities include the production, sales and delivery of products, and payment collection from customers including purchasing raw materials, building inventory, advertising, and shipping the product. Other activities include cash inflow from investors, sponsors, banks, and stakeholders, and if the company generates sufficient income then the cash outflow would include returns to stakeholders.

Operating Activities

Operating activities play a major role in proving that the company is alive and running. It also indicates the ability of the company to generate a profit based on the business structure or model functioning at the specified time. If no profit is generated from the operating activities then the investments made by the company in terms of infrastructure or manpower are dispensable, and if the company continues to invest then it would end up in a financial crisis.

These activities represent the day-to-day operation of a business.  The cash inflow from these activities is the capital made from the sales of products and services.  Items include receipts from goods sold, tax payments, and interest received from loans.

Investing Activities

Purchase of assets, especially long term assets or materials that are essential to make the company’s products or to sell those products represent the investment activities for the company.  Investment activities can be in the form of stock purchases or security deposits. The visibility of investing activities is the issue when it comes to major investments. It lists activities only paid for in cash. For example, if a company were to purchase $1 million worth of equipment with only half a million dollars in cash and the rest in financing, then only that half a million will show up as investment.

Financing Activities

Financing Activities represent the cash inflow and outflow to investors and shareholders.  Raising funds from bonds or stocks is considered cashing in, whereas paying dividends to investors and paying interest to stock holders and bond holders is considered cash outflow.

The income statement is always prepared as accumulative accounting and so the collection of the revenues reported may be absent. Balance sheets can be analyzed to review the change but cash flow statements already incorporate all the information. Thus cash flow statements are utilized judicially.

Cash flow statements can be utilized in two ways – by comparing the cash inflow from operating activities with the company’s income.  If this cash inflow is always greater than the net income, the company’s net worth is said to be of a “high quality”. Else, questions as to why the income is not being translated into cash are raised. The second method is to identify and cash in on investors who believe that cash flow statements prove a company’s worth. A stakeholder will look at the company’s cash inflow. In case it has been consistently increasing, the company can increase its investments in any form and increase its infrastructure too. This will provide the stakeholder more incentive to work with the company.

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