The waves live in constant motion on the shore of financial life, crashing and renewing endlessly; it is the list of cash flows, those vital tributaries that nourish the body of the economy and give it life and growth; so, what exactly are these charming flows that form the beating blood in the arteries of business and institutions?
Let’s embark together on a journey to explore the secrets of cash flows, and it is worth noting that cash flows come from different sources and go to multiple destinations, as it flows from sales of products and services, accumulates in corporate balances, and moves between bank accounts and investments, which are not just numbers and balances but rather a living artery that flows throughout the economy, carrying with it dreams, challenges, and growth.
What is the meaning of a cash flow statement?
If you’re wondering: What is the meaning of the word cash flow? It is a powerful financial tool that illustrates the movement of funds inside and outside a company or institution during a specific period of time, as it highlights the cash flows related to the economic, operational, financing, and investment activities carried out by the institution, thus reflecting the company’s financial condition and its ability to generate positive cash flows.
Primarily focused on the company’s cash income and expenses Cash income includes the amounts that enter the company from sales of products or services, debt collection, financial investments, and any other sources of cash.
Types of cash flows
Cash flows can be classified into three main types according to the activities that arise from them:
Cash flows from operating activities
These flows relate to the core activities of the company that relate to the production and sale of its products or the provision of services, and the statement of cash flows from operating activities includes:
- Flows from sales and related operations, including cash payments received from customers for sales and services provided.
- A list of cash flows paid to suppliers, employees, and other users of the company.
- Cash flows related to operating expenses, such as salaries, wages, general and administrative expenses, and production costs,.
- List of flows related to taxes paid and due.
Cash flows from investment activities
These flows relate to the investment activities of the company, such as buying and selling fixed assets such as property, equipment, and vehicles; investing in securities and shares of other companies; and buying and selling real estate investments. Cash flows from investment activities include the following:
- Cash flows are paid for the purchase of fixed assets or real estate investments.
- List of flows received from the sale of fixed assets or real estate investments.
- Cash flows related to investing in shares and bonds of other companies.
Cash flows from financing activities
These flows relate to the financing of the company, financing its activities from external sources, such as borrowing from banks, issuing bonds, or issuing shares, and cash flows from financing activities include:
- Cash flows received from external financing, such as loans, bond issuance, and share issuance,.
- A statement of cash flows paid to repay debts or distribute dividends to shareholders.
- Cash flows related to the purchase or issuance of the company’s shares.
When was the cash flow statement made?
Cash flows are determined when changes occur in the organization as a result of the sale or purchase of fixed assets or financial investments. For example, when a company sells fixed assets, such as real estate or equipment, these cash flows will appear in the list.
Similarly, when a company buys fixed assets or invests in new securities or ventures, the list of cash flows associated with these operations will appear in the list as well.
Note
Cash flow statements reflect net cash flows, which is the amount that indicates the company’s cash profit or loss over a specific period of time, and it is worth noting that net cash flows are calculated by subtracting cash outflows from the company (such as salary payments, general expenses) from the cash inflows to the company (such as sales income, debt collection).
If the cash inflows are greater than the cash outflows, the net cash flow will be positive, indicating the generation of cash gains, and vice versa.
Objectives of the cash flow statement
The main objective of calculating and analyzing cash flows is to provide a comprehensive understanding of the monetary impact of the various economic activities carried out by the company during a specific period of time, and the following are some of the main objectives of cash flows:
Clarifying the cash implications
The cash flow calculation helps to clarify the direct financial effects of various economic activities on the company, as it can show how the buying and selling, investment, and financing operations affect the company’s available cash and changes in its cash balance.
The company’s ability to increase cash
By analyzing cash inflows and outflows, the company can determine its ability to generate sufficient cash to meet its financial obligations and implement future development plans.
Increase retained earnings
Cash flow can provide a company with the possibility of increasing retained earnings when it has a positive net cash flow; this excess cash can be used to increase investments or distribute dividends to shareholders.
Maintain an optimal cash balance.
Companies can use cash flow analysis to determine the optimal time to carry out activities such as investing, borrowing, or distributing profits, helping to achieve a sustainable financial balance.
Forecast the size of future cash flows.
By analyzing past and current cash flows, the company can predict the size of expected cash flows in the future; this helps in financial planning and strategic decision-making based on future cash flow projections.
How is cash flow calculated?
You need to know the financial accounts in the company and start with a specific time frame for calculating the cash flow, as the financial period of the company, such as the fiscal year, can be used as a time frame for calculating the cash flow. Suppose we calculate the company’s cash flow during the fiscal year. The method would be as follows:
Calculation of changes in the balance sheet
First, we will start by calculating the changes in the company’s balance sheet during the specified period; it reflects the assets, liabilities, and equity of the company at a certain point in time, and it is worth noting that calculating the cash flow will require analyzing changes in the balance sheet from the beginning to the end of the period.
Opening a Balance Account
Second, we will start by calculating the opening balance, which is the amount of cash available to the company at the beginning of the specified period. This balance may be the remaining cash balance from the previous financial period or any cash balance available at the beginning of the new period.
Cash Flow Account
Third, we will calculate cash flow by summing up all cash inflows to the company during the financial period and subtracting all cash outflows from the company during the same period. It is worth noting that it must include all cash flows related to the company’s activities, including sales, purchases, investments, and financing.
Note
The cash account can be expressed as the sum of all inflows and outflows from the company during the financial period; this allows us to know the net cash amount generated during the given period. If the cash inflows are greater than the cash outflows, we will have a positive net cash flow, and vice versa if the cash outflows are greater than the cash inflows.
Cash flow statement formula
Finally, a simple formula can be used to calculate cash flow:
Cash flow = cash inflow minus cash outflow.
Cash flow statement example
Suppose an institution has 20,000 riyals of outstanding debt at the end of the accounting period and 20,000 dollars in cash at the beginning of the period. The cash account will then become zero dollars, which means that the institution did not generate any cash during that accounting period. There is another practical example, which is as follows:
| Xxx Xxx Xxx Xxx Xxx Xxx Xxx Xxx | Xxx Xxx Xxx Xxx Xxx Xxx |
Example of the period-end balance for cash
Cash balance at the end of the period = cash balance at the beginning of the period + expected cash receipts during the period + expected cash outflows during the period.
Case in point: Let’s say you start with 1000 riyals; during the month, you spend 1500 riyals on expenses; you sell products worth 300 riyals in cash; and you make another sale for 1200 riyals, but the buyer will not pay you for two months.
At the beginning of the following month, if you use the accrual accounting method, your balance sheet may show that the total value of your company is still SAR 1,000, which comes from SAR 1,000 minus SAR 1,500 (expenses) + SAR 300 (sales) + SAR 1,200 (accounts receivable).
However, the cash flow statement will show that your account may be overdrawn and you will have a balance of -200 riyals unless you increase your cash sales or reduce your expenses during the month.
Conclusion
It can be said that the cash flow statement is a powerful and vital tool to understand the financial position of the company and analyze its cash impact, as this list helps us to understand how cash flows within the company and how it is used in operational, investment, and financing activities.
By analyzing cash flows, we can identify, use, and direct cash sources in a way that helps the company achieve and develop its financial goals, and do not forget that our understanding of the cash flow statement can give us a comprehensive view of the challenges and opportunities that the company faces in terms of financial liquidity.
With the ability to implement growth strategies, meet its financial obligations, and rely on cash flow analysis, the company can make accurate forecasts for the future and make strategic financial decisions based on these expectations.
Let’s embark on the journey of exploring the cash flow list with the Qoyod program, and do not forget that our understanding of it can help us identify the strengths and weaknesses in cash management. It is worth noting that the program also offers all its customers: electronic invoice systems, point of sale systems, stores, customers, etc., making it the best accounting software in the Middle East.
Now that you know what a cash flow statement is and what its types are, try Qoyod now for free. For 14 days, it is an accounting program that meets all your requirements.
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