Cash Flow

Cash flow is the movement of money in a company over a certain period: where it comes from, what it is spent on, and how much remains.

Cash Flow explained

Net cash flow (NCF) sums up receipts and payments. The total NCF is made up of cash inflows and outflows in three directions, each of which has its own task. Cash flows can be divided into three groups.

Operating cash flow. This is the main item of income. Sales, dividends, and interest earned on investments give an increase. Net income decreases due to production expenses, including interest and tax payments.

Investment cash flow. This group includes cash flows associated with long-term assets. Gains come from decreases in investments, abandonment of property, real estate, equipment, intangibles, and other assets. Gains in all of these areas, on the other hand, result in spending.

Financial cash flow. This group is made up of long-term liabilities and equity. An increase in long-term loans or the sale of shares gives an inflow of money; a decrease in liabilities and the distribution of dividends to shareholders gives an outflow.

Operating Cash Flow

Operating activity is anything that relates directly to a company's core business. What we usually count so-and-so - sales revenue, payroll, rent, purchases of raw materials or goods, advertising costs, and so on. In other words, all the income from our work and all the expenses in order to do that work.

This is the key cash flow. It ensures the stable financial position of the company. And when there are enough receipts from clients to cover operating expenses in already existing retail outlets, then the remainder can be used for business development.

This is what the operating cash flow looks like in the cash flow template

Operating cash flow can be:

• Positive - receipts from customers are enough to cover all liabilities of the business.
• Negative - the money received this month is not enough to pay the obligations.

In the end, calculating operating cash flow helps an entrepreneur answer several questions:

Is there enough of your own money to ensure the smooth operation of existing outlets or do you need to find some additional amount? Estimate the difference between planned expenditures and operating cash flow revenues.

How much revenue should be provided to avoid a cash flow gap? Estimate the amount of operating expenses.

Is there enough equity to buy expensive equipment, an office, or invest in a new line of business without jeopardizing operations? Evaluate the difference between planned expenditures and operating cash flow income by cumulative total over a period of several months.

It's very important to plan for operating cash flow, because otherwise there's a great risk of a company getting into a cash gap - a state of temporary shortage of money to cover major liabilities. 

Financial Cash Flow

In essence, this flow includes external financing of the company, and vice versa - the withdrawal of money to the owner or investors, the payment of loans and credits. Often there is a situation like this: the client has a cash gap, the owner brings in cash from some home reserves and puts it into the cash register. This will be the financial cash flow.

That is, in the financial cash flow, the money does not come from customers, but from somewhere outside. In fact, it was through this flow that the entrepreneur in the first example took the company to a general advantage - he just added a bunch of both his own and borrowed money to it.

It's the same with expenses - the money doesn't go into the operation, but into the pocket of the owner/investors, or to pay off debts.

When planning your financial cash flow, it's important to consider which receipts are non-refundable (such as a grant from the government or a one-time investment for a stake in the company) and which will have to be paid back later.

Investing Cash Flow

Buying new equipment, opening a second production line or another line of business is an investment activity. All related outflows and inflows are investing cash flow. It helps create new sources of profit and grow the business.

That is, it is the flow when we buy or sell a company's fixed assets - all the things that should bring us profit in the long run, but not now, and are not related to the company's core business at the moment.

Sometimes investment cash flow is confused with operating cash flow. For example, if a restaurateur opens a second outlet and does something there every day - paints the walls, installs equipment - it's not an operating activity, it's an investment activity. But the maintenance of an existing outlet or an already running line of business, as well as their income, can be attributed to operating cash flow.

When planning investment cash flow, it is important to understand how much money is spent on operating cash flow, and how much is left free for the same investment. Or a situation will happen that a new machine tool is bought, but we can't pay the salaries.

It is also important to remember that without investment, the operating company will continue to bring in revenue and profit. There just won't be any new directions. That is why a competent entrepreneur invests the positive difference in operating activities painlessly for the main work of the company.

Understanding the balance of costs and revenues in each area helps correctly assess the current state and prospects of the company. But more importantly, it enables cash flow management and planning:

• Operating cash flow so that the difference is positive and growing.
• Financial cash flow so that at the expense of grant financing and lending to avoid cash gaps (when there isn't enough money temporarily for necessary expenses).
• Investing your savings wisely.

Through operational financial planning, the business can maneuver its own, borrowed and loaned money in the most rational way and meet payment deadlines - so that it stays in the black. Various deferred payment options help him do this. For instance, with eLama you can pay for over 15 advertising systems and services up to 30 days in advance.

It is the observance of balance that ultimately turns out to be the main thing in doing business. The level of income in isolation from the concept of cash flow says little about its financial stability: even a highly profitable company can go bankrupt due to lack of cash. Therefore, calculating and planning cash flow is very important for the well-being of a business.