Cash Flow - Things to know about it

Posted on 22 June, 2016

"Cash", when we hear this term, our "Flow" of thinking always goes into one direction of related topic being discussed on that point of time! It is fact that we all are now moving into such age, where virtual money is taking place of actual money! And even more, Bitcoin has become a reality now, and we have to accept it as well. As it does not matter now, from which form, the money transfer form person to person or place to place, important thing is to track its transactions and get all related details.

Even more, if we go into depth of such transactions such requirement arises, especially in corporate world, to prepare such statements which identify incoming and outgoing details of cash in/from company. Here novice like me, think that why we need such details, as in the end of day, when checking all details of accounts, we will have final figure of cash in hand, than why we even need to bother about that ? 

Well, that stuff is important, the reason, is that based on that one can identify that how many ways are there into their company, from cash comes in and goes out. Let's have some example from where cash comes in, 

  • Selling service or goods
  • Bringing equity in
  • Reduce cost as much as possible
  • Borrow from bank or other financial sector as loan
  • Selling company assets 

As counterpart of these, there are points, which reduce cash from your company, such as

  • Purchasing goods, assets in company
  • loan & it's interest payment
  • Tax payment to government
  • Payroll of employees

But still, why need of such statement ?

Though such statement do have importance on day to day basis, but in certain period of time, like 6 months, or in a year, weight-age of such statement is even more, as we can get such details that do we have cash as positive or negative. (Here, one thing needs to taken care of that if flow of cash is too high, than it does not mean that it's good sigh, and if it's low, than position of company is not that good). Having related data, it helps management to take decision, such that in future, how much stuff they require to achieve their goals, how much they can spent on different expenses, which in the end, comes up with direct (or indirect) benefit of company, or even help to avoid bankruptcy ! 

It does not mean 'Cash' only !

As the name  suggests, cash flow to measure cash of the company, but it also includes other liquidities which can in no time can be converted into cash, like stock/shares of other companies, bonds (either from other private sectors or from government). Here we can also include cash deposit, as we can any time withdraw it and have cash on hand. We could have extended list by including goodwill into it, but that is debatable one, as many thinks that it's not that easy and quick to convert it into form of cash.

Measure company's liquidity

Based on size of company, team of management needs to identify that what should be an ideal figure for them as liquidity, as that can vary from company to company. With such statements, management gets all cash related details, for past and present as well, based on that, they can make analysis for the future, and extract liquidity related details for future as well, which than can help them to do balancing act between income and expense. 

This does not include Profitability!

Though both cash and profit can sound similar, but there is difference between those, as positive cash in statement does not mean that business has profit, it may also indicate that payables of that business not being paid into time. Which currently raise the cash into high positive while in the end, cash balance goes deep into negative, and makes even harder to run business (here it does not mean that you should pay to your suppliers in advance or few days before payment term ends, obviously, you have to take full advantage of those days). This could lead to business into bankruptcy as at some point of time and there will be no cash left for them to pay to their debts, employee and other costs.

Helping out to reduce costs

As we know, there are quite a ways to get more cash flow into company, or we can also say that there are ways, which stop more cash to go out from company, which generally is costs, being spent on company. While preparing such statements, we can identify those hidden costs, and later on, we can get rid of some of those, or can make more cost effective methods, which in the end, help company to have better report card.

Helpful on Repurchase or Resale of your own assets/bonds/shares

As management aspect, many time company repurchase their own assets, based on their need (or due to some accounting aspects), here with such statement, they do have idea about current and future financial position. With cash having on hand, company can buy-back their own assets/shares. Based on figures on those statements, company can take advantage of volatile (or declining) market and can do stock buyback. Such decisions has more value related to accounting, rather than actual business, but if such option is available, than company do prefer to take it with the help of such statements.

It's much easier to prepare cash flow statements, but it's very much tricky to make analysis of that, as it may create illusion and present different position of company, than actual one.  As it says in accounting world that it's very easy to be profitable into paper, than actual! This is perfectly relates to cash flow statements, as one has to be more careful while doing analysis of it. This is really a nice tool, helping out management to take decision, both for long term as well as day to day basis.

Kunal Pathak , Odoo Project Manager

Odoo Blog

About Emipro

Being an emerging leader in IT market since 2011, Emipro Technologies Pvt. Ltd. has been providing a wide range of business solutions in Odoo & Magento. We are pleased to have a large pool of contented customers with our meticulous work in the domain of ERP & e-Commerce. Our customers are companies of all sizes ranging from startups to large enterprises who realize that they need a professional internet solution to generate revenue streams, establish proper communication channels, to achieve desired goals and streamline business operations. [....] Read More

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