Cashflow

Cashflow is one of the key financial indicators that shows how much money flows into and out of a company over a certain period. It ensures the financial stability of the company and allows for the management of its development.

Positive and Negative Cashflow

• Positive Cashflow: When the company’s revenues (from sales, investments, loans) exceed expenses (salaries, rent, taxes), the business grows steadily and has the potential to expand.
• Negative Cashflow: When expenses exceed income, this can lead to financial difficulties, particularly a shortage of funds to cover operating expenses.

Cashflow control and management are crucial for maintaining the financial stability of a business. Effective analysis allows for avoiding cash gaps, making timely financial decisions, and planning for future company growth.

Three Main Types of Cash Flow

There are three main categories of Cashflow that companies track to analyze their financial activity:

1. Operating Cash Flow: Reflects the movement of funds related to the company’s core operations. This includes income from sales and expenses for production, wages, rent, and taxes.
2. Investing Cash Flow: Shows the flow of funds related to investments, such as the purchase or sale of assets (real estate, equipment). This metric indicates how a company invests in long-term assets.
3. Financing Cash Flow: Reflects the movement of funds related to financing, including receiving loans, issuing shares, paying dividends, and repaying debts.

Each of these cash flows provides important information about the company’s financial position, helping managers make informed decisions to ensure stable business growth.

Specifics of Cashflow Calculation

Cashflow can be calculated for different periods (daily, weekly, monthly, quarterly, semi-annually, or annually), allowing the business to maintain financial stability and make effective decisions. In the early stages of a company’s activity, it is recommended to calculate the projected cash flow monthly, and over time, switch to quarterly and annual analysis.

How to Calculate Cashflow:

1. Define the period for calculation.
2. Define the goal for which the cash flow calculation is needed.
3. Calculate the total income.
4. Calculate the total expenses.
5. Use one of the formulas for calculation.

Cashflow Calculation Methods:

• Direct Method: Includes a direct calculation of all cash receipts and expenses for the selected period. This method is more transparent as it shows actual cash flows but may require more detailed record-keeping.
• Indirect Method: The calculation starts from the net profit (or loss) and adjusts for changes in working capital, liabilities, and non-cash transactions. This method is more convenient for accounting but less transparent for analyzing actual cash flows.

The Importance of Cashflow Control

Cashflow control is critically important for maintaining the financial stability of a business. Regular analysis, planning, and optimization of expenses help avoid cash gaps and ensure the company’s steady development.