In today's globalized world, the emergence of new companies has become increasingly common, as the technological tools that have achieved great growth in recent years, such as the various applications that can be used on the internet, have It has led many entrepreneurs to start businesses that can separate them from the professional limitations that can often be found in an office.
Similarly, large companies also continue to grow steadily, Therefore, today it is possible to meet a wide variety of businesses and companies of all kinds.
However, these were not made overnight and in order for them to remain stable and growing for many years, they had to carry an adequate financial control from the beginning, since no business manages to prevail in today's competitive business sector. in day, if not through a optimal capitalization and liquidity that allows them to face a drastic reduction in income or some sudden large expense that can be fatal for those companies and businesses that are not financially protected.
What is Cash flow about?
In order to solve the problems related to liquidity and profitability, which is an issue that new companies can encounter, or that can even affect large already established companies, we find the issue of cash flow, also known as cash flow or treasury, a novel method that can be understood as an indicator that offers us information about the financial status of a small business or even a large company, that is, it is about keeping track of the inflows and outflows of cash or cash in a given period, tool that allows us to be much more aware of the expenses and income of the company. In short, it is about finding the balance between our needs and our economic possibilities to solve them.
What kind of applications can cash flow studies have within a company?
Cash flows can have different functionalities to ensure the financial stability of a company. Some of its main uses can be applied to the following cases:
To solve a company's liquidity problems:
Many times, it is often thought that to ensure the proper functioning of a company it is only necessary that it be profitable, so many small entrepreneurs lose the opportunity to grow their businesses, lacking some of the basic fundamentals that they should always have in mind. account when they make the expenses and expenses that can lead to bad cash flow. That is why this cash flow option allows you to anticipate cash balances, with the aim that you never have cash problems, a situation that should never arise for any company even if it is profitable.
Flow cash allows you to analyze the viability of investment projects:
In order to know the benefits of venture to invest in a certain economic project, the flow cash allows you to make use of the cash flows that are the basis for calculating the net present value and also the internal rate of return that it has. With this data, you can know the pros and cons of any investment project you have in mind.
Measure profitability and growth:
Cash flow also allows you to measure the profitability and growth that a business can have in a certain period of time, especially in those cases in which accounting standards do not satisfactorily represent the economic reality of said business.
What elements does the Cash flow consist of?
Cash flow is an indicator that is usually made up of the following elements: Profit + amortization + provisions.
These three elements are necessary to be able to carry out the cash flow analysis, in such a way that, according to this indicator, both amortizations and provisions are costs that must be added to the benefits according to a specific period, and not necessarily these costs. they suppose an outflow of money, that is, despite being a cost, the amortizations do not have to mean a cash outflow, because accounting they suppose a reduction of the result of the year, but this does not imply that they are a disbursement as such. The important thing is that the cash, that is, the treasury remains available. The objective of this procedure is that through cash flow, one is able to know what are the financial availabilities that a given business has, that is, the amount of cash that a company can generate during a certain period of time.
What is the importance of applying cash flow in today's businesses?
Cash flow is of paramount importance today, as it is a fundamental tool with which we can keep track of the amount of money a company produces. This data is essential to be able to know our financial health and thus be able to lead the evolution that our business or company will have over time. Likewise, making adequate use of cash flow will also allow us to generate better agreements with other companies and suppliers, because by knowing our cash flow, we will know how to comply with our payments or what commitments can be established according to the financial solvency of the company. business.
What types of Cash flow are there?
By their origin, there are different classifications of cash flow to which we can resort to solve a specific problem regarding the liquidity or solvency of a business.
- Operating cash flow: It is the cash received or delivered as a result of those basic economic activities that the company has. In summary, we refer to the amount of money raised thanks to the basic economic activities of the company.
- Investment cash flow: It is the cash collected or expended after having considered the capital investment expenses that may benefit the business in a given future. The important thing about this kind of cash flow is that all those investments that may benefit later on are taken into account, such as the purchase of new machinery for a factory, for example, or the fact of dedicating themselves to new investments or acquirers that yield their respective benefits in the future.
- Financing cash flow: It is the cash collected or expended as a result of different financial activities that can vary from payments or receipt of loans to issuance or purchase of shares. Of course, there are a large number of financial operations through which money can be received or paid, which is why this type of cash flow is ideal to keep track of the liquidity managed and received in the various financial movements of a company.
Are there limitations to the Cash flow calculations?
The most used and known way to calculate cash flow It is the one known as accounting cash flow. This formula is one of the most used, especially in the different exercises that are for comparative purposes, however, it does have a very important limitation, which is given by the so-called accrual rule.
Basically, this consists of entering the earnings as treasury to accounting profits, which is far from coinciding with reality. The reason is that when invoices are made for a sale, the benefits for said transaction are recorded, however this does not mean that we have actually collected the value of that sale. In other words, this problem arises because today many companies tend to have deals and agreements with suppliers or vice versa.
Said deals or agreements consist, for example, of granting credits to successfully carry out a sale, which means that the purchase is made but the money for that sale is not received immediately. For example, if a supplier manages to sell a series of products or items with a certain value to a company, it is normal for the purchase to be made in cash, but nowadays it happens, very frequently, that the sale of the products is on credit or that is conditioned according to the use or benefit that the company obtains from those products.
In consecuense, credit sales They appear many times in the invoices of a business, but usually an agreement is reached with the buyer so that we are paid later, so the value of these sales is not in liquid cash but represents a profit that is entered in the invoice even though the money will be received in a certain future.
This is what is known as deferred sale and when it is presented, it is normal that part of the sales of one year, together with its benefits, will remain pending collection until the next year, of course, in case everything goes well, because if things go wrong for the one who buys the items from us under this concept, then those sales will not be charged, as this is a benefit that is offered as long as we have a kind of agreement in which we will be making purchases from time to time weather. The problem is that in the invoices we have already recorded those sales when it is still not certain that we will receive the money from them.
The solution for this type of problem is that we equip ourselves with several instruments to measure the levels of cash or liquidity of a business, whether these are current or planned, so that we can better manage them and better calculate costs and benefits. of the financial movements that we carry out.
Conclusions
Undoubtedly, the cash flow or cash flow, It is an excellent resource for the accounting exercises that we can carry out to optimize the profits and benefits of our business or company. By making correct use of this method, we will definitely be one step ahead in the evolution of our business, and with your due effort and dedication, we will be able to grow it into a quite fruitful company, which is not only profitable but also has great liquidity. to face any economic unforeseen.