Cash flow is a component of business bookkeeping that you must use to manage your company. Cash flow is important because it can present an overview of common financial conditions that can be used to plan and evaluate the financial aspects of business activities.
What is Cash Flow?
Cash flow is a type of financial report that is used to find out every income and expenditure. As stated before, cash flow is very important, especially for anyone who needs to do financial management, be it personal, household, or business.
In business itself, cash flow is a management tool for measuring the cash coming in and going out of a business in a given period. That way, it can be seen whether or not the business cash is sufficient to support daily operational activities. In this financial report, there are also important terms that you need to understand, for example a free cash flow.
Free cash flow is cash flow obtained by the business after deducting several costs, such as depreciation and capital investment. To conclude free cash flow is the remaining cash held in a business after financing its operational activities and investments.
When a business is having a positive cash flow, it means that the amount of cash inflows to your business will be more than the expenses. This also means that the company will have no trouble paying salaries, bills, and covering other business expenses. While on the other hand, a negative cash flow means that the amount of business money spent is greater than the income.
To keep your cash flow in a healthy condition, you need to evaluate it periodically. This is important to see whether there are problems that occur in business finance. In cash flow, there are two main elements, namely cash inflow and cash outflow.
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Cash Inflow
Cash inflow is a cash flow stream containing all types of transactions that can provide income for the business. When there are incoming transactions, business capital will also increase so that business growth can increase over time. There are several examples of cash inflow, such as sales of goods or services, collection of receivables, obtaining loans, and other types of income.
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Cash Outflow
In addition to incoming money, there is also a cash outflow. In the cash outflow, various transactions give rise to operating cash disbursements. This expenditure transaction aims to maintain business. When a business activity does not issue capital or money for its needs, it will certainly be difficult to maintain the business.
Therefore, a business cash disbursement plan must be made as wisely as possible so as not to suffer losses while having to spend funds. An example of cash disbursements includes expenses for raw materials, employee salaries, taxes, debt, and investment repayments.
What Are the Types of Cash Flow Activity?
Apart from having flow as its main element, you also need to understand some activities related to cash flow, such as the following.
1. Operational Activities
Operational activity in cash flow is a financial report that has reference to cash from business operations. In this activity, the cash flow report will only see the net profit generated by the business. Meanwhile, the function of these operating activities is to maintain business development.
Some examples of cash flow operating activities are purchases of goods for production, sales taxes, employee salaries, machine maintenance, and other operating expenses.
2. Investment Activities
The next type of activity in cash flow is investing. Investing activity shows a cash flow statement that contains sales or purchases of fixed assets. Currently, almost all businesses that have developed will usually carry out investment activities. These investments will generally be made on inventory that has an estimated age of more than one year.
Included in cash flow investment activities are the sale or purchase of fixed assets, the purchase, and maintenance of business equipment, long-term investments, and others.
3. Funding Activities
Another type of activity in cash flow is for funding activities, which are obtained from additional business capital. This activity will refer to the cash flow that moves between the company and several owners, creditors, and investors. So, it can be concluded that financing activity is a net cash flow that can be used to finance several things, such as equity, dividends, and debt.
Conclusion
Cash flow will be very useful for business. Thus, even though you may have to undergo a serious and long calculation to ensure the company has a proper cash flow, this financial report will do wonders for your business i.e. your business will be more financially organized!
If you want to make a cash flow report but have no idea how to do it yourself, you can look for accounting services that can help you to manage your business’s operational matters to practical calculations!
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