The amount of cash and cash equivalents that is transferred into and out of a business is called cash flow. It is the movement of cash and cash equivalents. Securing and maintaining a positive cash flow is significant for every business. A business that is financially strong performs much better in the market as compared to a business that is not financially incapable.
Activities of cash flow
Cash flow is divided into three categories for making it easier to understand. Below are the three activities it is divided into –
- Operating activities
- Investing activities
- Financing activities
Operating activities
Operating activities are cash activities that are related to net income. For instance, cash earned from the sale of goods and cash that is paid for various expenses. The revenue earned through the sale and expenses incurred are included in the net income.
Investing activities
These are defined as activities that are related to noncurrent assets. Noncurrent assets include property, plant and machinery, equipment, long term investments. For instance cash earned from the sale of land and cash paid for an investment in another company fall under the category of investing activities.
Financing activities
These are activities that are related to noncurrent liabilities and owners’ equity. Noncurrent liabilities include principal amount of long term debt, dividend payments.
Analysis of cash flow
Cash flow analysis is defined as the evaluation of the several inflows of cash to the company and outflow of cash from the company.
Cash Flow Management
Cash flow management means keeping track of the cash flow and conducting an analysis on a regular basis to understand any changes made to it.
Importance of Cash Flow Management
Cash is important for every business and so is cash flow management. All businesses must be aware of the circulation of the cash of the business and maintain a record of all cash related transactions.
- Increase the accuracy while counting cash
- Helps in the elimination of errors
- Maximizes the availability of cash at times when it is required
- Having a sufficient amount of cash that the company reserves helps take effective financial decisions which proves to be beneficial for the company at later stages of business’s life.
Cash flow management strategies
Businesses make several plans to maintain a certain level of cash flow (inflow and outflow). Some ways the businesses can maintain cash flow are as below –
- Request for a deposit or milestone payment
- Request customers to pay at the stipulated time
- Delay unnecessary expenses that are not required at the moment
- Request favorable payment terms from vendors
- Finance purchase orders.
- Increase margins
- Sell or lease idle equipment
- Sell future revenue
How to keep track of cash flow
There are various ways in which a business can keep a track of your cash flow. Some of the ways are mentioned as below –
- Monitor cash flow on a regular basis
- Cut costs
- Invest maximum cash by purchasing different types of assets
- Lease equipment instead of buying it
- Utilize mobile payment services in order to get paid faster
Types of Cash Management
The cash management system is divided into various types –
- Short term instruments such as Money Market instruments and mutual funds, Treasury Bills, Certificate of deposit (CD), etc.
- Checking account
- Savings account
- Long term low-risk savings instrument
Advantages of Cash Flow Management
All types of businesses, whether big or small, undertake measures to maintain a good cash flow. Managing the cash that comes in and the cash that goes out is significant as it provides many benefits.
- It provides information about several cash transactions undertaken for a particular year
- It helps in the evaluation of the financial structure of the business
- It helps in the identification of the profitability of the business
Cash flow statement
A cash flow statement is a financial statement that provides a collective data with regards to cash inflows a company receives from all of its operations and investments. It also includes all types of cash outflows that the businesses pay to suppliers or while buying equipment, machinery etc.
How to improve business’s cash flow
- Make changes in the prices according to the industry standards
- Conduct payment discipline
- Re-evaluate operating expenses
- Restructure crucial business strategies
- Preparation of customer incentives
- Execution of multiple income streams
Conclusion
Supervision and management of cash is the most significant aspect of every business. Thus, individuals must plan and execute strategies and methods that could result in the effective cash flow of the business.