For those who involved in business or in charge of managing business finance, the term of ‘cash flow’ is quite familiar. Anyway, what is exactly cash flow? Let’s see the the following explanation.
Cash flow has a vital role in company’s daily operation. Cash flow is like the blood on the human body, because there is no single business that can be separated from cash flow. However, theoretically, cash flow is a financial statement contains information regarding the cash effect towards operating activities, investment transactions, financing transactions, and increased or decreased the net cash in a company for a certain period.
Two kinds of cash flow are:
Inflow cash is a cash flow as the result from transaction activities that creates cash benefits. It consists of:
- Sales result from products or services
- Result from account receivable collection on sales credit
- Sales result from fixed asset
- Result of receipt investment from owner or share
- Result from loans or debts from other parties
- Result from other revenue and lease
Outflow Cash is a cash flow consists of various transactions that may cause cash disbursement expenses. Outflow cash consists of:
- Result of direct labor costs, raw materials and other company costs
- Result of sales administration and general administration expenses
- Result of fixed assets purchased
- Result of payable payments to company
- Repayment result of owner’s investment
- Result of rent payment, interest, tax, dividend, and other expenses. A cash flow report provides an interrelated information between the company’s revenue and expenses during a certain period by classifying transactions based on operating, funding and investment activities.
This activity creates revenues and expenses derived from the company’s main operations. Therefore operating activities will affect the income statement that has been reported on an accrual basis. While the cash flow report informs its impact on cash. Collecting interest based on the loan and dividends on investments represent less important cash flows. For outflows cash from operations may include payments to employees and suppliers as well as tax and interest payments.
Investment activity may increase and decrease the long-term assets that have been used in the company’s activities. Fixed assets sales or purchase such as buildings, land or equipment are the investment activity or the form of investment sales or purchase for shares or bonds of other companies. The investment activity in the cash flow report includes more than just the asset sales and purchase that have been classified as an existing investment in the balance sheet. Lending is also one of the investment activities caused by a loan will create receivable to a borrower. The loan settlement will be reported as an investment activity occurs in the cash flow statement
Funding activities include activities in obtaining cash from an investor and a creditor that is required to run and continue the existing activities in the company. The funding activities include stock expenses, loan through notes issuance and bond loans, treasury stock sales that represents payments to shareholders such as dividends and share purchases made by the treasury. Payments to the creditor only includes the primary loan payment.