Cash flow is a very important metric that is used in business or financial analysis. It measures the inflow and the outflow of cash that is related to a business or organizations investments, finances and operating activities. Cash flow is therefore divided into these three main categories that are used to calculate the overall liquidity of a business. They are highlighted below.
1. Cash flow from investing activities
Cash flow from investing activities comprise of inflows and outflows of cash involving other companies securities such as bonds and stocks.
Cash inflows from investments comprise cash received from the sale of securities that were made as an investment in other companies e.g. stocks, bonds, debentures, profit sharing agreements, etc. It also includes cash made from the sale of your companies’ assets such as buildings and equipment.
Cash outflows from investments comprise cash spent or paid to acquire securities or to purchase assets such as buildings and equipment.
2. Cash flow from financing activities
Cash flow from financing activities comprises of inflows and outflows of cash involving the debt and equity financing of the company. It includes cash paid out or received from your companies issued stocks, debentures, bonds and other securities.
Cash inflows from financing comprise of cash received from the sale of your companies’ securities including shares, debentures, bonds, etc.
Cash outflows from financing comprise of cash spent or paid out towards re-purchasing equity sold out, or bought back from your companies’ securities that had been sold out to another party. It also includes dividends paid out to shareholders.
3. Cash flow from operating activities
Cash flow from operating activities describes cash inflows and outflows of cash generated from normal daily transactions and operations needed to smoothly operate the business.
Operating cash inflows comprise of cash received from the sale of products and services, as well as cash interest and cash dividends received.
Operating cash outflows comprise cash payments for goods bought or expenses made for the day to day running of the business. Some of these transactions include petty cash payments, fees and fines made out etc.
These operating cash flows can be difficult to track on account of their sheer volume and frequency, but there are some financial instruments such as checks or credit cards that you could use to help you keep track of them.
If you go to websites like http://www.gemvisa.co.nz/credit-card-features/, you can see some of the advantages of using this credit card, like to track your payments, and therefore maintain accurate and up to date financial records. For example, the Gem card allows you to manage your credit card online and see your transactions on a daily basis.
4. Calculating the overall cash flow from investing, financing and operating activities
If you add up the opening cash flow net balance from a previous period to the sum of the 3 cash inflows and then subtract it from the sum of the outflows from investments, financing and operations, you will be able to have an accurate calculation of your company’s net cash flows.