Data Science

Your Full Guide to Cash Flow: Top 10 Terms You Must Know


Your Full Guide to Cash Flow: Top 10 Terms You Must Know

Cash flow refers to the flow of cash and its equivalent in a company. This includes both the inbound and outbound flow of cash within a specific period. Cash flow also indicates the financial health of an organization. It states whether a company will be able to pay its current dues and manage its daily operations.

Cash equivalents often refer to the kind of financial assets that can be converted to liquid ones or liquid assets in a short period. Some examples of cash equivalents refer to treasury-based bills, government-related bonds, etc.

Mapping and tracking cash flows are often considered to be an instance of financial reporting. People or organizations often look to cash flow as one of the determiners of the company’s financial status and standing.

What is Cash flow? – A detailed explanation

As mentioned above, the term cash flow refers to an organization’s inflow and outflow of cash. Free cash flow is the cash that a company generates after the outflows of cash are taken into consideration. Together, they are often used as a benchmark to gauge a company’s financial situation.

Generally, a business, company, or organization receives cash or observes an inflow of cash through the following methods:

  • The amount of interest owed to them 
  • Return on certain investments
  • Their profit or share of cash in case of licensing agreements
  • Certain royalties on company-owned properties etc.
  • Sales of products and services

What is positive cash flow?

Now, positive cash flow is a term used to describe the inflow of cash into the organization. Moreover, positive cash flow leads to an increase in the financial standing of the company. 

The positive cash flow experienced by a company allows to it perform or fulfill several functions such as: – 

  • Allowing the company or organization to invest in its various businesses again
  • Fulfilling certain obligations such as the salaries of the employees etc.
  • Returning certain sums owed to entities such as shareholders etc.
  • Building bullion or reserve against potential future financial threats

What is negative cash flow?

Negative cash flow, on the other hand, is a term used to describe a situation wherein the company is unable to fulfill or perform the various functions described above, such as: – 

Returning certain sums owed to entities such as shareholders etc.

Building bullion or reserve against potential future financial threats etc.

What is cash flow management?

Simply speaking, cash flow management refers to the analyzing, monitoring, etc. of the inflow of cash with the deduction of the outflow of cash, or simply, the deduction of the cash expenses from the cash receipts. 

It helps in gauging the free cash flow of a business as well as its financial health.

What are the types of cash flow based on their nature?

Now, depending on their nature or how they come to be, the types of cash flow are: – 

Cash flow from investing

Cash flow from investing refers to the amount of cash or finances an organization spends on all activities related to investments in various areas.

Such activities include ones such as selling various assets or investments, purchasing assets of speculative nature, etc.

Cash flow from operations

Cash flow from operations refers to the cash flow incurred from the various activities involved with the operations a company or organization conducts. This form of cash flow determines the capacity of an organization or firm to engage in its daily operations. 

The quantity of cash inflow should be more than the quantity of the cash outflow for an organization or firm to claim a successful amount of cash flow from operations.

Cash flow from financing

Cash flow from financing refers to the cash flows incurred by an organization in the course of its various funding activities concerning the expenses of the company itself. Some examples of the same include paying off various dividends, issuing debt money, etc.

 What are some of the terms used in cash flow?

As with every aspect of every sector, the aspect of cash flow in the financial sector also has some terms which are commonly used, such as: –

  • Credit limit
  • Automated card payments
  • Bank reconciliation
  • Bottom line
  • Billing software
  • Business agility
  • Cash flows position
  • Credit control
  • Cash flow forecast
  • Credit terms

Meaning of the terms used in cash flow

The meanings of the above terms or terminologies associated with cash flow are: –

Credit limit 

Credit limit refers to the limit set by financial institutions on their customers’ spending limits with the help of a credit card or an overdraft account. One cannot go beyond this limit while withdrawing from this account.

Automated card payments

Automated card payments refer to the frequent or periodic payments that are automatically debited from customers’ bank accounts. These can include a wide range of requirements.

Bank reconciliation

Bank reconciliation refers to the matching of an organization’s inflow and outflow of cash with the bank statements it submits. Differences between the two often help in uncovering the instance of fraud.

Bottom line

The bottom line refers to the overall net income of an organization or firm after tallying all financial accounts.

Billing software

Billing software refers to the software that helps an organization or firm carry out its various financial processes. 

Business agility

Business agility refers to the ability of an organization or firm to work swiftly and efficiently in case of evolving circumstances in the market. 

Cash flow position

Cash flow position refers to the amount of money or the financial standing of a firm or organization at any given instance of time. It can be measured through the cash flow statement or by performing a cash flow analysis.

Credit control

Credit control refers to the ability of a business to make sure that their customers or clients return the money owed to them. 

Cash flow forecast

Cash flow forecast refers to the projected cash flows of an organization for a given financial period. This forecast helps the organization set goals for that year and is calculated using the cash flow statement

Credit terms

Credit terms refer to the rules observed between the organization and its customers in the event of credit-related transactions. 

Usage of the credit-related terms

The above terms related to cash flow are utilized in the following areas: –

Credit limit

The credit limit is used in the world of banking to limit the outstanding of a company or an individual.

Automated card payments

Automated card payments are used in banking to denote the permission from a customer to deduct funds on a particular date.

Bank reconciliation

Bank reconciliation is used in accounting and auditing to check any discrepancies in a company’s accounts.

Bottom line

The bottom line is used in the world of finance, in general, to find out the net income of a company.

Billing software

Billing software helps companies to create bills and use them primarily in transactions.

Business agility

Business agility is used in the world of business. Primarily it is a concept that denotes a company’s ability to deal with any sudden situation. 

Cash flow position

The cash flow position is used in the business and commerce world that shows a company’s current financial position through a cash flow analysis

Credit control

Banks and other financiers use credit control to manage lending and repayment.

Cash flow forecast

A cash flow forecast is used by businesses to predict the inflow and outflow of cash in the coming period.

Credit terms 

Credit terms forecast is used in the world of finance and business used by companies to determine the terms of credit.

How can businesses, organizations, or people optimize their cash flow?

Now, organizations can optimize their cash flow with the help of the following techniques:

Leasing instead of buying

It is easy for any company looking to manage the cash flow to go ahead with the leasing process instead of buying. It saves the capital investment upfront and saves liquid cash.

Discounts for early payment

Another way of managing the cash flow is by offering discounts to receive early payment. It increases the inflow of cash, which helps the process.

Forming a purchasing or buying co-operative

Well, it is a hard one to pull off, but if realized, then it can be a great maneuver in the long run.

Conducting credit checks on customers

It is essential to perform a credit check on every potential customer before selling any product. It lowers the risk of non-payment.

Using digital or electronic payments

The lack of cash should not have come in a company’s way of securing payment. So, using digital and electronic payments will help firms to rake up payments easily.

Sending out immediate or instant invoice bills

Sending out the invoice immediately helps companies to collect payments faster.

To sum up, cash flow, especially the positive one, brings financial strength to a company. It puts the organization in a strong position helping it to manage its overall operation without any hiccups. The knowledge of cash flow accounting is a critical one in the world of finance.

The Hero Vired Financial Analysis program allows you to learn core financial concepts and principles as they are applied in the real-world, including about free cash flow, cash flow accounting, how to perform a cash flow analysis, how to read a cash flow statement,

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