Cash Flow. What it is, types and how to calculate it

Riskallay

1/3/2023

7 min

A company's cash flow consists of the monthly and annual statement of the company's cash inflows and outflows, i.e., the sources and uses of funds.

In the cash flow statement the exposure is temporary, plotted in days, months, years. In specific accounting statements, such as the statement of source and application of funds, the exposure is annual.

What is the Cash Flow of a Company?

A different view of the financial statements or balance sheets of companies lies in analyzing the origins and applications of funds. In fact, in international financial reporting standards and in local accounting standards, there is an accounting report called cash flow statement, statement of source and application of funds or other similar denominations.

Types of Cash Flow

In order to prepare the statement of source and application of funds at a cut-off date, it is primarily necessary to have a time organization of the company's income and expenses for different concepts, for example: derived from its main activity, investment and financing activities.

The organization of cash flow is often a problem for companies, but individuals often intuitively organize their income and expenses in a notebook or Excel spreadsheet.

The difficulty in the preparation of the cash flow lies in the correct scheduling of rotations or movements in the different activities of the company, for example:

Operating cash flow

The operating cash flow consists of detailing over time the expected cash flows related to the company's main activities.

Examples of income in this cash flow are income from sales of goods and services.

Examples of outflows in this cash flow are all those disbursements derived from input or material costs, labor costs and indirect manufacturing costs.

Normally, inventory turnover terms, supplier debt turnover terms and terms for the payment of non-negotiable debts, such as salaries, direct tax debts, social security debts, among others, must be taken into account.

Cash Flow from investing activities

The cash flow associated with investing activities usually impacts the company's financial income through dividends, exchange differences, exchange rate differences, interest, capital amortization, and other profits derived from short and long-term investments.

These are the company's financial expenses associated with investment activities, for example: disbursements for the purchase of goods for use, payment of trademarks and patents, disbursements made for the purchase of shares, securities, bonds, and even foreign currency.

Cash Flow from financing activities

Cash flows related to financing activities usually have an impact on both the company's cash inflows and outflows, depending on the type of financing activity carried out.

Examples of income from financing activities are: interest and other financial costs charged to customers and other debtors of the company.

Examples of expenses derived from financing activities are: disbursements of principal and interest for payment of short and long-term debts held by the company. This includes debts for financing through bank loans, pledge loans, mortgages or other similar loans.

Principal and interest amortization payments are also considered in the case of bonds or negotiable obligations issued by the company. In addition, interest on payment plans for tax or social security debts must be taken into account.

Free Cash Flow

Free cash flow is the cash available for the company to distribute to its partners or shareholders.

The determination of this free cash flow consists of calculating the cash available in the statement of source and application of funds, but at the same time, taking into account the company's income statement and the statement of changes in shareholders' equity, which require the maintenance of specific reserves of a portion of the profits before they can be distributed.

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Related content:

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Cash Flow Calculation - Formula

Static Cash Flow Calculation or statement of source and application of funds

(Operating Income - Operating Expenses) = Cash Flow from Operating Activities

(Investment Income - Investment Expense) = Cash Flow from Investment Activities

(Revenues - Financing expenses) = Cash flow from financing activities

(Positive or negative value) = Availability of cash on hand

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Interpretation of a company's cash flow

A company's cash flow result can be positive or negative:

Positive cash flow

In this case, cash inflows derived from the different activities exceed cash outflows. The company has cash available to distribute to partners or shareholders, always considering legal limitations that may exist to do so.

Negative cash flow

In this case, cash inflows are lower than cash outflows. The company is having problems paying its debts and expenses derived from different activities. In this case, it is essential to analyze which activities are generating problems, the rotations of collections and payments, the viability and profitability of each of the activities, among other factors.

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