• 30Sep

    What is cash flow?

    The company can be in a good position on the market and at the same time might have problems with liquidity. The problems with cash flow occur when a company is supplied with an inadequate level of capital, in times when profits are low or nonexistent, or when the company is unable to supply its business with fresh money from external sources. Cash flow represents the difference between cash receipts and cash payments (inflows and outflows) in one period of time and is a measure of financial health of the company.

    Through cash flow analysis, one can summarize the company’s business activity and see how much money is earned by it in one period. It also reveals where the money comes from and how it is utilized. It provides insight about the liquidity and solvency of the business because it eases the process of identifying potential problems before they appear.  There are three basic cash flow statements: Operational, Investment, and Financial Cash Flow.

    Operational Cash Flow

    Operational Cash Flow represents the difference between inflows and outflows coming from operational activities which demonstrate the level of production and selling. As the operational activities are most important for generating the profit, Operational Cash Flow is also known as a fundamental cash flow. Operational Cash Flow has on its inflow side revenues and on its outflow side all expenses from the operational activities such as costs of production, suppliers, taxes, insurance and other expenses.

    Investment Cash Flow

    Investment Cash Flow represents the statement that reports changes in the company’s cash position generated by the long-term assets. Cash flow coming from investments is not exactly the amount of cash generated through investing. It refers to stocks, bonds and other investments.  On the inflow side, there are numbers calculated from selling  stocks, profits from dividends, and interest rates or return on assets. On the outflow side there are similar calculations involving purchase of new stocks, bonds and other long-term investments.

    Financial Cash Flow

    Financial Cash Flow represents the difference between equity and debt of the company. It also reflects the level of debt and is a good indicator of the company’s financial health. On the inflow side, there are long and short term credits, money generated from emission of stocks and government subsidies. On the outflow side, there are paid long and short term debts, paid dividends, and other papers.


    Cash flow analysis makes it easier to make decisions

    Cash flow is a very useful report, because it gives very important information about companies – their productivity and financial condition. After analyzing cash flow, the company will be able to diagnose more detailed indicators about critical aspects impacting the business. For example, after detailed analysis, it could be evident that the company is profitable but operates with too little operational cash. After summarizing financial indicators and evaluating the financial position, management of the company can make a decision to increase operational cash by taking a loan. That should raise productivity to a higher level and at the same time should not cause damage to the financial health of the company.

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