Flow cash or cash flow is the amount of money moving in and out of a business. That is to say, it is a detailed presentation of the different cash flows that a company can have in a given period.

The organization can generate money or resources regardless of the type of financing structure it has.

It is also defined as the perfect indicator of liquidity that an organization has and that allows preparing the account statement of the same.

The cash flow presents a statement that shows the amount of cash remaining in the company after taking away expenses, bank interests, and capital payments, among other aspects to be taken into account.

Cash flow elements

The cash flow of any project consists of four basic elements. Namely:

  • The initial disbursements of the funds, that is, the investment.
  • The income and expenses of the operation (liquid, future and differentiable or avoidable)
  • The moment when these flows occur.
  • The value of scrapping or saving the project.

Cash flow utility

Cash flow is a very important tool in business management. Well, it allows to know and determine exactly the activities of the company. Also, it provides us with valuable information about the different cash movements and the operations that are carried out with it.

Cash flow also allows us to:

  • Objectively know the capacity and financial health of the company.
  • Know the operation of the company and its evolution.
  • Determine if we can meet the payment objectives.
  • Measure the business treasury by relating cash inflows and outflows.
  • Specify some aspects such as studying the viability of an investment, determining liquidity problems or measuring the profitability of the company.
  • Decide if it is necessary to request financing or, conversely, cash flow is sufficient to meet the commitments.

Cash flow classification

Different types of cash flow stand out when trying to respond to some situations that we find in the economic management of a company.

Depending on its origin, the operational (product of investments or divestitures) or that which originates from financial operations, different types of responses will be obtained.

Cash flow financing:

This type of flow is made up of the money that we enter through the issuance of shares or debts or the expenses that have had to be made for dividend payments to shareholders.

It is also the cash received from the issuance of shares or debt less cash paid as bonuses and re-acquisition of debts.

Investment Cash Flow:

This type of flow has to do with the investments made by the company. This reflects the collections they have in non-ordinary assets as well as the payments that must be made for them.

In other words, it can also be said that it is the money that enters and exits for an investment.

Operating cash flow:

It has to do with the commercial activity of the company. This includes sales revenue and expenses for payments to suppliers.

This type of flow reflects the money that enters and leaves the company due to operating expenses or commercial activity.

Importance of cash flow

Cash flow is the mathematical representation of the difference, in a given period, between collections (sales, loan interest, rents, and debt collection), and payments (taxes, invoices, and debt amortization), among others.

The information based on cash flow is what allows us to prepare periodic reports to make a real analysis of the financial health of the company. Also, we can identify problems to try to solve them as soon as possible.

Another very valuable indicator in the financial activity of the company is what is known as the “net flow”. This results from the difference between collections and payments. Well, in addition to measuring the liquidity of the entire company, it determines the viability of a business project.

If the balance of the net flow is positive, it means that the collections of the period have been greater than the payments of the same. On the contrary, if the balance is negative, the payments have been higher than the collections.

Cash Flow and Decision Making

The survival of a company will depend, basically on whether the flow that enters the company is greater than the flow that leaves. In cash flow, the information is organized correctly and this allows to project cash flows for the future based on real and historical data.

As mentioned above, the power of cash flow is that it is a very good indicator to determine the liquidity of a company while providing us with key information to answer questions such as the following:

  • How much merchandise do we need to acquire?
  • How will the purchase be, cash or investment?
  • We can use the excess money for investment.
  • We may cancel outstanding debts on the agreed date or we must request a refinance.
  • Anticipate future deficits or surplus.
  • Support the loan application.
  • Measure the profitability of projects.

Cash flow is a scheme that systematically and organized shows the costs and revenues recorded in each period. It is a key element to analyze a business proposal.

The assumptions or data on which each cash flow was prepared so that it can be understood by others must be known.

It is also essential to keep in mind that liquidity, the main result of cash flow, is a vital part of any business and the most important indicator of the company’s financial health.

For that reason, you must manage your liquid assets very well as no company will survive without liquidity. The key to good cash flow management is planning to take into account all aspects involved in a business economy.

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