{"id":11800,"date":"2023-07-25T12:00:00","date_gmt":"2023-07-25T12:00:00","guid":{"rendered":"https:\/\/businessyield.com\/?p=11800"},"modified":"2023-10-15T06:34:25","modified_gmt":"2023-10-15T06:34:25","slug":"cash-flow","status":"publish","type":"post","link":"https:\/\/businessyield.com\/finance-accounting\/cash-flow\/","title":{"rendered":"CASH FLOW: All you need to know, Simplified!!! (+ Free format)","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"\n
The common goal of every business is to ensure it yields <\/a>enough cash to cover various expenses while still making a profit. Every investor wants a company that has a positive cash flow. This article explores everything about cash flow. Ranging from definitions to types of cash flow and format. It also includes a format and step-by-step guide on how to calculate cash flow with examples.<\/p>\n\n\n\n Cash flow is the accumulative amount or net amount of money a firm or business has. In other words, it is the amount of cash that a business <\/a>makes over a period of time.<\/p>\n\n\n\n Interestingly, the value of most businesses is based on the amount of cash flow they have. whereas a positive cash flow will attract more investors and also allow the company to reinvest. When there is enough inflow of cash the company can as well pay its debts.<\/p>\n\n\n\n A flow of cash is positive in a firm when the income is greater than the expenses i.e. they make profit. On the other hand, cash flow is negative when a business spends more than it earns. Which means they are making loss.<\/p>\n\n\n\n The volume of cash flow can also be checked by using financial statements, which is very essential in finance. These statements will enable firms to measure the volume of their positive or negative financial flow. Knowing the types of this cash flow can also go a long way.<\/p>\n\n\n\n There are 3 types of Cash flow, having a good understanding of every one of them is a great way to improve financial accounting.<\/a> <\/strong>Understanding these methods that cash flow will also help you identify them even without being mentioned. The types of cash flow include;<\/p>\n\n\n\n This is cash that the business or firm makes from business activities. For instance, the money made from selling goods and services also including the expenses made. Because they all make up the net income of the company or business.<\/p>\n\n\n\n This can also be called “investment activities.” It means the amount of cash remaining after reinvesting back into the business. For instance, a company might decide to rent some of its space and then reinvest the money gotten from it into the business. This type of cash flow, however, includes noncurrent assets.<\/p>\n\n\n\n This can also be called “financial activities.” It is the amount of money flow that changes over a period of time especially within the time the firm does accounting.<\/p>\n\n\n\n Every business has regular bills to pay and income to earn, from paying salaries to buying raw materials to selling goods and services. All these are the ways money flows on a daily basis in business. Since it’s now obvious that there must be circulation of cash in every business, we will now answer the question above why is it important? This applies to all types of cash flow.<\/p>\n\n\n\n First, it is important to know that cash flow doesn\u2019t mean profit. But if properly managed, it <\/strong>can yield a profit. For instance, a company sells goods worth $2000. and then pay a tax of $200. while paying off their debt of $600. \u2013say this business has 10workers that it pays $150 monthly. If this business doesn\u2019t have a cash reserve, it means it can\u2019t pay all its workers and certainly would go bankrupt soon. A proper flow of money in a business certainly means that things are going well, which means the business is profitable.<\/p>\n\n\n\n Having a steady positive fund flow can help you borrow money without fidgeting. Because literally, when you are a debtor, it simply means you have used your future money. How much more when you are almost certain it will be a positive flow. In other words, positive fund flow can help you manage your debts properly<\/p>\n\n\n\n A company with a good fund flow is very attractive to investors. The company also has a great opportunity for improvement in training, technology, assets. All these are forms of reinvestments a company can do if they have a strong money flow. <\/p>\n\n\n\n There are two cash flow formats. The direct and indirect types. The operating system is the only difference.<\/p>\n\n\n\n This shows the gross cash payment and the gross cash receipts. In other words, it adds various types of cash payment, including the ones paid to suppliers and those paid as salaries. They are calculated using two balances which are the beginning and ending balances of a business account. All this will happen while examining the increase or decrease of the accounts.<\/p>\n\n\n\n On the other hand, the indirect method first calculates the flow of money from operating activities. At the same time using the company\u2019s income statement to calculate the net income. Most companies use the accrual method to do this which is a type of financial accounting. In most cases, the indirect method adds some non-operating activities like depreciation.<\/p>\n\n\n\n In the cash flow format, there are four things that are involved in writing every cash flow statement. Cash loow from;<\/p>\n\n\n\n This is usually the fist in the cash flow statement. Which is because it shows the amount of money from a company\u2019s day to day business activities, such as producing goods, selling goods and services, interest payment, income payment tax, rent payments, etc. It is also Important to know that this operating activities does not include investments or expenses.<\/p>\n\n\n\n It will include all uses and the sources of the cash from everything the company has invested. Everything the company has ever purchased, sold, lent or even received will be added in this category. For instance, if the company should buy new equipment, assets or make investments. It will equally be added to this category.<\/p>\n\n\n\n Financial activities are made up of cash from investors or bank, it also includes cash paid to shareholder, repayment of loans, and payment of dividends. For instance, if a company issues a bond to the public, the company will record it as financial activities. There are certain changes in cash financing, \u201ccash in\u201d- increase in capital and \u201ccash out\u201d -dividends are paid.<\/p>\n\n\n\n List of profitable small businesses: top 35 (+ detailed guide)<\/a><\/p>\n\n\n\n The most common way to calculate money flow is to use the cash flow statement. This cash flow statement will indicate the accurate flow of funds in and out of your business within a specified period of time. In finance<\/a>, it is one of the core financial statements needed in a business.<\/p>\n\n\n\n Here is a simple cash flow format;<\/p>\n\n\n\n Cash from operating activities + (-) investing activities + (-) financing activities + Beginning Cash balance = Ending cash balance.<\/p>\n\n\n\n In addition, it is important to know that the cash flow format uses everything in your balance sheet, including profit and loss statements, because all of this shows the sources of your money within that specific period of time.<\/p>\n\n\n\n In this cash flow example, a company named Q Factor<\/strong> has $130,000 of annual profit but only a $10,000 closing amount by the end of the year.<\/p>\n\n\n\n Cash from operating activities = $80,000 + (-) money from investing activities = $50,000 + (-) from financing activities = $40,000 + Beginning cash balance = $15,000 = Ending cash balance = $10,000<\/p>\n\n\n\n Here is how they calculated the flow of their cash;<\/p>\n\n\n\n This cash flow example showed in detail how Q factors managed their money and the details of the activities that influence the cash inflow and outflow. This will help Q factors be analyzed better in other to have a more positive cash flow in the future.<\/p>\n\n\n\n In this example of cash flow, there is a detailed statement on how company A calculated their money flow.<\/p>\n\n\n\n Company A’s Cash Flow Statement<\/strong><\/p>\n\n\n\n The above cash flow examples can serve as a template for you to calculate your own financial flow.<\/p>\n\n\n\n At this point, I am sure you have come to understand how important positive money flow is for your business. Meanwhile, you might be wondering how you can increase fund flow in a business, here are some strategies below;<\/p>\n\n\n\n Offering incentives to customers who pay on time is definitely one way to encourage all customers to pay on time. This means you have more cash and are on time, too. However, sending out invoices early also help customers pay up early.<\/p>\n\n\n\n You should know that any customer who doesn\u2019t give you cash is a creditor, even if you have made the sale. Moreover, credits don\u2019t add to your cash. Even if you must supply on credit, you have to be ensure that the customer has a good reputation by doing some credit checks.<\/p>\n\n\n\n To increase fund flow, you will need to carry out an inventory check. Take note of all the goods or services that don\u2019t give you enough cash and try to reduce how much you invest in them. Even if the product or service is just slow, it reduces your money flow because you won\u2019t get early returns from it. If you don\u2019t do this from time to time, you might get your money tied up in particular goods or services. Also, be sure not to tie your emotions to any particular product.<\/p>\n\n\n\n It\u2019s quite unfortunate that most business owners always feel skeptical about increasing their prices. Whenever there is an increase in the cost of production, no matter how little, it should definitely reflect in your prices, don\u2019t wave it off! Don\u2019t assume you will lose customers when you haven\u2019t even tried.<\/p>\n\n\n\n You can also use some customer retention strategies<\/a> to increase your money flow.<\/p>\n\n\n\nWhat is Cash flow?<\/strong><\/span><\/h2>\n\n\n\n
Positive and Negative Cash Flow<\/strong><\/span><\/h3>\n\n\n\n
Types of Cash Flow<\/strong><\/span><\/h2>\n\n\n\n
#1. Cash from Operating Activities: <\/span><\/h3>\n\n\n\n
#2. Free Cash to Equity (FCFE): <\/span><\/h3>\n\n\n\n
#3. Free Cash Flow to the Firm: <\/span><\/h3>\n\n\n\n
Why is Cash Flow Important?<\/strong><\/span><\/h2>\n\n\n\n
#1. It makes the business more profitable: <\/span><\/h3>\n\n\n\n
#2. Easier payment of debts: <\/span><\/h3>\n\n\n\n
#3. Opens doors to great opportunities: <\/span><\/h3>\n\n\n\n
Cash Flow Format<\/strong><\/span><\/h2>\n\n\n\n
#1. The direct method<\/strong><\/span><\/h3>\n\n\n\n
#2. Indirect method<\/strong><\/span><\/h3>\n\n\n\n
\n
Operating Activities Cash Flow Format<\/span><\/h4>\n\n\n\n
Investing Activities Cash Flow Format<\/span><\/h4>\n\n\n\n
Finance Activities Cash Flow Format<\/span><\/h4>\n\n\n\n
How to Calculate Cash Flow <\/strong><\/span><\/h2>\n\n\n\n
Cash Flow Examples<\/strong><\/span><\/h2>\n\n\n\n
Example1<\/span><\/h3>\n\n\n\n
Net Income<\/td> $130,000<\/td> <\/td><\/tr> Income not paid by customers<\/td> ($80,000)<\/td> <\/td><\/tr> Expenses not paid to vendors<\/td> $25,000<\/td> <\/td><\/tr> Cash flow from Operations<\/strong><\/td> <\/td> $80,000<\/strong><\/td><\/tr> Investment (machines)<\/td> ($45,000)<\/td> <\/td><\/tr> Cash from Investing<\/strong><\/td> <\/td> ($50,00)<\/td><\/tr> Company’s draw<\/td> ($35,000)<\/td> <\/td><\/tr> Cash from financing<\/strong><\/td> <\/td> ($40,000)<\/strong><\/td><\/tr> Beginning cash<\/strong><\/td> <\/td> $15,000<\/strong><\/td><\/tr> Ending cash<\/strong><\/td> <\/td> $10,000<\/strong><\/td><\/tr><\/tbody><\/table> Example 2<\/span><\/h3>\n\n\n\n
Cash From Operations<\/strong><\/td> 3,000,000<\/strong><\/td><\/tr> Net Earnings<\/td> <\/td><\/tr> Addition to Cash<\/td> <\/td><\/tr> Depreciations
Decrease in Accounts (Receivable)
Increase in Accounts (Payable)
Increase in Taxes Payable<\/td>10,000
25,000
18,000
3,000<\/td><\/tr>Subtractions from Cash<\/td> <\/td><\/tr> Increase in Inventory<\/td> 40,000<\/td><\/tr> Net Cash from Operations<\/strong><\/td> 3,016,000<\/td><\/tr> Cash from Investing<\/strong><\/td> <\/td><\/tr> Machines<\/td> 700,000<\/td><\/tr> Cash from Financing<\/strong><\/td> <\/td><\/tr> Payable Notes<\/td> 15,000<\/td><\/tr> Company A’s Ending cash<\/strong><\/td> 2,300,000<\/strong><\/td><\/tr><\/tbody><\/table> Tips to Improve your Cash Flow<\/strong><\/span><\/h2>\n\n\n\n
#1. Incentives for Early payments<\/span><\/h3>\n\n\n\n
#2. Be Careful with Credit Sales<\/strong><\/span><\/h3>\n\n\n\n
#3. Inventory Check<\/span><\/h3>\n\n\n\n
#4. Increase in Price<\/span><\/h3>\n\n\n\n