In finance there is a particular jargon and terminology when it comes to naming each of the aspects of the economy. Whether it is domestic or family economics, business, state, etc. Every thing that is derived from money and can be counted must be classified so as not to end up with a pile of meaningless data. And of course, in companies, there is a wide financial terminology, such as Cash Flow.
In this article we will talk about Cash Flow, also known as cash flow. How is it accounted for, what types exist, and how to use it to know how solvent a company is. In addition, it must be said that although the term exists and is more widely used in the business world, it can also be used in the domestic economy. In the end, it all comes down to how much control we have over it, and of course, you can take advantage of it.
What is Cash Flow?
Cash Flow or Flow of Cash, is a term that refers to all cash inflows and outflows of a company, in the broadest sense. Despite being used as a thermometer where a positive cash flow is understood as profitable for a company, a liquidity problem does not necessarily indicate that the company is not profitable. In fact, cash flow can be used to find out the following things:
- Cash problems. There may be a negative cash flow, without meaning that the company is not profitable. In fact, the purpose is to anticipate and determine cash balances.
- To find out how viable an investment activity can be. Thanks to the cash flow, the net worth and the internal rate of return can be calculated and the future returns on the investment can be determined.
- To measure the profitability or growth of a business. It is not strictly necessary, but there may be circumstances in which the accounting standards do not fully represent the economic reality of the company.
Then, there are 3 types of Cash Flow, depending on the liquidity flows that you want to analyze. The operational cash flow, the investment cash flow, and the financing cash flow. Next we will see them.
Operating Cash Flow
Cash flow from operations (FCO) is the total amount of money a business generates. from its activities and operations. It allows knowing all the inflows and outflows of money from the operating activities, so it is difficult to manipulate. Within it you can also include expenses to suppliers, personnel, sales, etc.
Income includes all those related to sales and services, collections and bills receivable within those sales. Also all income from customers, as well as the State and/or aid or payments for the purchase of goods.
Finally, within the expenses, those related to raw materials or products for later sale can be included. Also payments to suppliers and personnel, as well as taxes that are paid to the State derived from the exploitation of the activity.
Investment Cash Flow
The investment cash flow is all the inflows and outflows of money derived from investment activities of the company. Within it, financial products that can be converted into liquidity, such as the purchase of real estate as well as tangible and intangible fixed assets, can be accounted for. Also purchases of machinery, investments or acquisitions. All of them always in order to obtain future profitability.
Financing Cash Flow
The financing cash flow is that cash from financial activities. They can be both the money that comes from or is paid from loans, share issues, buybacks and/or dividends, for example. It is all that liquidity that comes from financing operations, that is, the liabilities and own funds of the company in the long term. Also included are bond issues or capital increases, which represent liquidity inflows.
Calculate the cash flow in the family economy
Although it should be a duty for any family or person, calculate the cash flow can be a difficult task, or rather, dense. Many of the expenses or benefits that we have are not reflected in the current account. If we pay in cash, a little whim, small purchases that we can make even on a trip, should all be accounted for. If instead the receipts are reflected, the letters that we may have, the rent of the house in case it is, etc.
To calculate it, just write down all the inputs and outputs that we have, the main input being usually our salary. If we are self-employed, the inputs are highly variable cash. The cash flow should be done beforehand to determine our profits depending on the activity we do.
Basically the calculation would be as follows. Cash Flow = Net Benefits + Amortizations + Provisions.
Having control of our finances and having a positive cash flow will allow us to anticipate the positive balances with which we can make future claims. From buying a home, to investing leftover money.