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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.

H2: 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: – 

  1. Cash flow from investing

    This type of 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.

    Example of the type of Cash flow from Investing

    • Purchase of Property, Plant, and Equipment (PPE)
    • Sale of Property, Plant, and Equipment (PPE
    • Acquisition or Sale of Investments
    • Acquisition or Sale of Subsidiaries or Business Units
  2. 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. 

    In this type of cash flow, 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.

    Example of the type of Cash flow from Investing

    • Cash received from sales
    • Payments to supplier
    • Salaries and wages
    • Payments for operating expenses
  3. Cash flow from financing

    This type of 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.

    Example of the type of Cash flow from financing 

    • Issuance of Equity
    • Repurchase of Equity
    • Issuance of Debt
    • Repayment of Debt
  4. Operating cash flow

    In this type of cash flow the net amount of cash that a company generates from its operations, after capital expenditures and income tax payments are accounted for.

    Features and examples

    Operating cash flow is useful because it tells you how much of a company’s profits are being reinvested in itself, rather than paying off debt or distributing dividends to shareholders.

    Here are some examples of type of operating cash flow:

    • Sales of goods and services
    • Receivable collections from customers
    • Payments to suppliers for inventory purchases
    • Selling products or services
    • Making investments

    How to Calculate Operating Cash Flow

    This type of cash flow is calculated by subtracting the change in operating assets and liabilities from net income. The resulting figure shows what remains after deducting all of the expenses and payments.

  5. Investing cash flow

    It’s the amount of money you have to invest. It’s also the amount of money that you need to hold onto for things like paying employees and buying products or services.

    Features and examples

    Investing cash flow is important because it helps you keep track of the money you’re making off your investments.

    Examples of Investing types of cash flow

    • Buying stocks, bonds, mutual funds, and other securities that pay dividends.
    • Leasing a car or truck instead of buying one outright.
    • Investing in real estate through the purchase of rental properties or shares.

    How to Calculate Investing cash flow

    Add up all of your income and subtract any expenses, followed by subtracting any taxes. Finally, subtract any investments or debts.

  6. Financing cash flow

    This type of cash flow is the process of raising capital for a business by using debt or equity.

    Features and examples

    The financing cash flow can be used to purchase assets or pay off debt. This type of cash flow is the amount of money an entity has available from financing activities. It’s also the amount of cash generated from issuing securities or from borrowing money from debtors.

    The following are some examples of financing cash flow:

    • Using a line of credit to pay bills.
    • Taking out a short-term or long-term loan

    How to Calculate Financing cash flow

    Determine the sum of all interest expenses and dividends paid during the period for which you wish to calculate the figure. Next, take this total amount and divide it by the total number of periods in that same time period.

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: –

  1. 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.

  2. 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.

  3. 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.

  4. Bottom line

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

  5. Billing software

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

  6. 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. 

  7. 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.

  8. 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. 

  9. 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

  10. Credit terms

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

Also read about: Finance management: – Meaning, Scope, & Importance

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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.

Conclusion

In this guide, we have covered the major types of cash flow and the key terms used in it. Cash flow is a vital part of your business, and it’s important to know how to use it. 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,

If you’re learning to make a career in finance management, this Financial Analysis, Valuation, & Risk Management course can give you a boost. Read about Finance Manager Salary In India In 2023 here.

FAQ's

Operating, Investing and Financing cash flow
Operating cash flow is the most common type cash flow.
The main principle of cash flow includes:
  1. Earning more than you spend
  2. Saving up for rainy days
  3. Investing in growth opportunities
  4. Paying off debt
  5. Reinvesting profits

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