The Importance of Cash Flow
What is ‘cash flow’ and what does it represent?
To start off, let’s define ‘Cash flow’. Cash flow is the net amount of cash showing the amount of cash being flown in and out of the business, allowing businesses to see the intake of cash, as well as seeing the outtake the business is paying. A companies ‘liquidity’ gives the ability to increase the profitability of shareholders, which is determined by the cash flows positivity. It represents a measurement within a given period of time, cash flowing in and out of the business. With this in mind, it allows the optimisation within the management of cash giving the opportunity to plan ahead in terms of investments, and future financial distress.
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What is the ‘statement’ of cash flow?
Throughout the entirety of all of the financial statements, ‘cash flow’ holds one of the biggest roles, and even this can be broken down into three different categories. The three categories will be broken down into ‘Operating activities’, ‘Investment activities’ and ‘Financing activities’, which all have significant parts in structuring the statement of cash flow.
Cash flow of Operating Activities
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Cash flow of Operating Activities holds one of the most important roles out of the three. It tries to view the cash inflows and outflows that the core business operates. The main component of the statement shows the modifications within the cash, account receivables, depreciation, inventory and the accounts ‘payable’ segment. It conveys its significance within its viability of the business. To summarise ‘Operating Activities’, it is a process where the cash flow from operating activities converts all the reported items into a single ‘income statement’.
Cash flow of Investment Activities
Cash flow of Investment Activites is the second out of the three parts of the ‘Cash Flow Statements’. It’s the part that shows the inflows and the outflows through an ‘accounting year’. Any sort of investment activities always includes cash flows from a sale and purchase with fixed assets, and the sale and purchase of any investment of shares, properties businesses etc. To sum everything up, you could say that cash flow is an interest of reports about the purchases and the sale of long-term investments of property and equipment.
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Cash flow of Financing Activities
The cash flow of Financing Activities is the last part. It shows the inflows and outflows from the loans, shares and receipts etc. It is when the cash flow from any financial activity comes through and reports and sign of issuance and repurchase of the company’s own stock as the payment dividends. It also shows the increase and decreases within short-term and long term borrowings, share sales and repurchases and repayments of long-term borrowings. Summarised, it shows the reports of your company’s stock and the payment of dividends.
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Since we’ve defined cash flow, what it does and the statements of cash flow, we can go a bit deeper understanding this.
One of the most important and basic objectives when it comes to reporting anything within finance is assessing the cash flow from timing, to uncertainty. Anything can happen, and you need to make sure that understand the cash flow statement as it is significantly important when it comes to breaking down into the companies liquidity, flexibility and its overall financial performance. This helps a lot when you are trying to indicate your positivity of cash flow. Positive cash flow expresses the companies assets and if they are increasing. Once you have knowledge of this it opens a wide range of doors as it can help you settle debts / repay loans, pay expenses, create savings for future financial distress, invest back into your business or even extend your business further into additional locations to make your business grow.
Free cash flow (FCF) is any companies best friend. It can help you understand the true profitability of your cash flow in much more detail, as well as the cash flow in taking interest in payments. It shows the measurements and financial performance of a net income within a set time, except being more in-depth about the net income. It shows what money is left over to allow extensions, shares and debts to be paid for.