Cash flow: What it is and classification - GovtVacancy.Net

Cash flow: What it is and classification - GovtVacancy.Net
Posted on 25-10-2022

Cash flow: What it is and classification

Cash flow is the difference between an organization's cash receipts and payments. Proper cash flow management can reduce the need for capital, accelerating its turnover, as well as identify financial reserves within the company and therefore reduce the volume of external loans.

This happens by achieving the main goal - to ensure constant solvency at all stages of the planning period and forecast the company's cash flows in the context of individual types of economic activity.

What is cash flow?

Cash flow is always considered over a period of time. Most of the time this is the financial year. However, if the organization has a shortage of financial resources, then, depending on the time period, the following goals are pursued: in the short term - to speed up the attraction of money and slow down payments, in the long term - an increase in the volume of positive cash flow and a decrease in the volume of negative cash flow.

This last objective can be achieved by attracting funds from strategic investors, financial loans , carrying out an additional issue of shares, as well as selling investment financial instruments.

Classification of cash flows

All cash flows can be divided into three groups:

  • Cash flows from operating (production) activities: This is the main source of income. Growth comes from sales , dividends, and interest received from investments. Reduced net income due to production costs, including interest and tax payments.
  • Cash flows from investing activities: This group includes cash flows associated with long-term assets. The increase in funds is caused by the decrease in the volume of investments, the abandonment of real estate, real estate, equipment, intangibles and other assets. The increase in all these areas leads to spending.
  • Cash flows from financing activities : This group is made up of long-term liabilities and equity. An increase in long-term loans or the sale of shares generates an inflow of money, a decrease in liabilities and the distribution of dividends to shareholders - an outflow.

Cash flow analysis

The solvency and liquidity of the company often depend on the actual cash flow of the company. Therefore, to assess the financial well-being of an organization, a cash flow analysis cannot be dispensed with. The latter is based on reports, for which one of the methods is used: direct or indirect.

Indirect method of compiling a statement of cash flows

The report, compiled by the indirect method, concentrates information on the financial resources of the organization, reflects the indicators contained in the estimate of income and expenses and comes to your disposal after the payment of the factors of production to complete a new reproduction cycle. . Data on the receipt of funds is taken from the balance sheet, income statement. Only for some indicators, the calculation is made according to the actual volume:

  • depreciation charges
  • proceeds from the sale of own shares, bonds
  • receipt and payment of dividends
  • receipt and repayment of credits and loans
  • capital investments in fixed assets
  • intangible assets
  • financial investments
  • increase in working capital
  • sale of fixed assets, intangible assets, securities.
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