What does cash flow, types of cash flow and management strategies means

Efficient management of the cash flow is essential for financial health and long -term success of any company. In this detailed article, we will explore what the cash flow is, because it is essential for your business and how you can manage it effectively to guarantee the stability and growth of your company.

What is the cash flow and why is it essential for your business?

The cash flow (cash flow) represents the movement of money in/from a company in a certain period of time. Basically, it is the difference between the revenue (money that enters) and payments (money that comes out).

Why is the cash flow is essential for your business?

Here are the main reasons why the cash flow is an important indicator for long -term corporate strategy:

Guarantees liquidity

The cash flow is essential to maintain the daily functional business. Even if you have a high sales or accounting profit, the lack of cash can make it impossible to pay the invoices due.

For example, you sold products for a value of € 50,000, but customers pay 90 days. If in the meantime you have to pay the suppliers or the rental of space, without a good cash flow, you will have problems.

Prevents financial blocks

A continuous negative cash flow (higher expenses compared to revenue) can involve delayed payments, penalties or even inability to pay. You can lose the trust of suppliers and customers and company risks go insolvency.

Helps plan

By regularly following the cash flow, you will be able to anticipate the moments of excess or cash deficit. Therefore, you can perform important actions for the corporate strategy:

It is essential for investments and growth

If you have a constant cash surplus, you can invest without depending on external loans. A company with a positive cash flow can open a new work point, buy modern equipment or launch a new product without having to wait for the approval of bank funding.

Attract investors and funding

Any investor or bank analyzes the cash flow to see if the company:

• it is sustainable;
• can reimburse loans;
• Generates a real profit (not only on paper).

Therefore, the positive cash flow is an indicator of corporate stability and offers greater possibilities of attracting capital or loans in good condition.

Types of cash flow: understanding of sources and uses of money

To manage the cash flow effectively, it is important to understand the three main categories:

Cash flow from operational activities (OCF)

The cash flow from the operational activities represents the cash flow generated by the main activity of the company, that is, by the sale of goods or by the provision of services.

Sources of money for cash flow from operational activities

• enter the customers;
• tax reimbursements or subsidies;
• interest received (in some cases).

Uses of money for the cash flow from operational activities

• payments to suppliers;
• salaries and benefits used;
• Payments for rentals, public services, services.

The importance of the cash flow from operational activities

Represents the most important component of the cash flow. A healthy financial company has a constant positive operating cash flow.

Cash flow from investment activities (ICF)

The cash flow from the investment activities reflects the cash flows relating to the purchase or sale of long -term activities.

Sources of money for cash flow from investment activities

• sell equipment, properties or other fixed assets;
• Investment income (sale of shares, bonds, etc.)

Uses of money for the cash flow from investment activities

• the purchase of equipment, cars, properties;
• investments in other companies or projects

The importance of the cash flow for investment activities

A negative investment cash flow can be a good sign if the money is used for development (for example, extending the production capacity). A positive cash flow here could mean selling activities, which is sometimes a sign of renovation or crisis.

Cash flow from financing activities (FCF)

The cash flow from the financing activities includes cash flows from/direct to investors and creditors.

Sources of money for the cash flow from financing activities

• bank loans;
• issue actions;
• Other forms of financing.

Uses of money for the cash flow from financing activities

• reimbursement of loans;
• Payment of dividends to shareholders;
• redeem your actions.

The importance of the cash flow for financing activities

It shows how the company is financed – through debts or shares – and how sustainable the financial strategy is.

By analyzing these categories, it is possible to identify the main cash sources and how they are used within your company:

The difference between profit and cash flow: a necessary clarification

The difference between profit and cash flow (cash flow) is essential to understand the financial health of a company. Although both terms are connected to money, they measure different things:

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Profit represents the difference between total income and total expenses of a company in a given period. Profit is an accounting indicator, it is seen in the profit and losses account and does not necessarily mean that the company has liquid money in the account.

There are different types of profit:

• Gross profit: less direct direct costs direct costs (for example the cost of raw materials);
• Operating profit: after deducting operating expenses;
• Net profit: after all expenses, including taxes and interest.

Cash flow (cash flow)

Measure the company’s items and the actual results, they can be seen in the situation of cash flows. Cashflow shows if the company can pay for invoices, salaries or investments.

For example, a company carries out a sale of 100,000 you on credit (the customer pays over 90 days). In accounting, profit appears (recorded income). In fact, there is a positive cash flow only after the customer’s payment.

The profit shows if the company is profitable. The cash flow shows if the company is liquid. A company can be profitable, but to exhaust the money and enter insolvency, which is why both must be monitored carefully, taking into account the currency graph.

Effective strategies for the management of the cash flow

To maintain a healthy cash flow, consider the following strategies:

• Projections of the cash flow: elaborates periodic input and output estimates in cash to anticipate liquidity needs;
• Management of debts: establishes clear credit policies and banking guarantees, constantly pursues entries by customers;
• Expense control: monitor and decreases non -essential expenses, to preserve liquidity;
• Maintenance of a reserve in cash: Make sure you have enough funds, to manage unexpected expenses.

Tools and technologies for optimizing cash flow

The use of technology can simplify the management of the cash flow:

• accounting software: tools such as Quickbooks or Xero offer features to keep track of cash flows and report generation;
• Treasury management systems (TMS): automate the financial processes and provide a clear image of the cash position of the company;
• Billing and collection applications: Facilitates the rapid issue of invoices and monitoring.

The importance of proactive management of the cash flow

The constant monitoring of the cash flow helps to quickly identify any imbalances between income and payments, allowing you to take corrective measures, before becoming criticism.

A clear understanding of the availability of money provides trust when investing in equipment, staff, marketing or development are made. Financial institutions and investors carefully analyze the cash flow of a company. The proactive management transmits professionalism and reduces the perceived risks.

An effective management of the cash flow is essential for the stability and growth of your business. By including cash flows, the differentiation between profit and liquidity and implementation of appropriate strategies, it is possible to guarantee a solid financial base for your company. The adoption of modern technologies and constant monitoring of the cash position will help you anticipate challenges and capitalize on growth opportunities.