{"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

What is Cash flow?<\/strong><\/span><\/h2>\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

Positive and Negative Cash Flow<\/strong><\/span><\/h3>\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

Types of Cash Flow<\/strong><\/span><\/h2>\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

#1. Cash from Operating Activities: <\/span><\/h3>\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

#2. Free Cash to Equity (FCFE): <\/span><\/h3>\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

#3. Free Cash Flow to the Firm: <\/span><\/h3>\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

Why is Cash Flow Important?<\/strong><\/span><\/h2>\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

#1. It makes the business more profitable: <\/span><\/h3>\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

#2. Easier payment of debts: <\/span><\/h3>\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

#3. Opens doors to great opportunities: <\/span><\/h3>\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

Cash Flow Format<\/strong><\/span><\/h2>\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

#1. The direct method<\/strong><\/span><\/h3>\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

#2. Indirect method<\/strong><\/span><\/h3>\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