The type of cash flows your business has will include:
If your business isn’t monitoring each type of cash flows, it may not be getting the complete picture of the business's financial standing. Let's look at each type of cash flow so that you can have a good understanding of each.
Before we discuss the type of cash flows you may have, it’s important to know what cash flow even means. In the accounting world, this is a term to designate:
Total cash flow can be positive or negative, and it’s calculated by subtracting your outflows from inflows.
Cash flow has to include the actual money that comes into the business and can be used. For example, you can send out an invoice today, but until it’s paid, you can only count the costs involved in the invoice in your cash flow.
If you make a product, sell it to a customer and wait for the invoice to be paid, you cannot count the cash flow from the sale.
Instead, the cash can only be added to your inflows when the money hits your business bank account. Cash inflows and outflows occur in business daily, and you need to calculate cash flow based on these inflows and outflows.
Every activity performed where money is exchanged can be broken down into three different types of cash flow.
Now that you understand what cash flow is, it’s crucial to look at each type of cash flow to break your branded reports down even further. Oftentimes, most of your inflows will come from operations, but if you sell real estate or a subsidiary of your business, one of the other cash flow types may be the main source of inflows for the business.
Cash flows from operations are what most businesses think of when they think of their main type of cash flows. This is the money that comes into the business from cash activities, such as from selling products or services.
However, cash expenditures are also included in the mix.
Operating activities can have many inflows and outflows. However, let’s make the type of cash flows as simple to understand as possible:
As with each type of cash flows, you’ll need to calculate your total inflows and outflows. The next step is to subtract your outflows from inflows to determine the true cash flow from operating activities.
Cash flows from investment is the next type of cash flows, and it’s often abbreviated to just CFI. Businesses often have money going into and out of the business for various investments.
Investments are one of the inflows and outflows that are most difficult to understand because they can include multiple things. When you have CFI, this may include the following:
Investments are going to include noncurrent assets, and this may include multiple things, such as long-term investments, real estate, property and equipment investments.
Cash flows from financing activities, often abbreviated to CFF, are any cash activities for owners’ equity or noncurrent liabilities. This is a very important method of cash flow, although it can be difficult to fully understand without an example.
Financing activities are a part of business, and they may include some of the following:
Your financing activities are often difficult to break down into cash flow, but it’s important to know that they’re all noncurrent liabilities and anything related to owners’ equity.
Now that we understand all three types of cash flow, it’s crucial to understand that a cash flow statement may include all types or not. The accountant or software you use may just consider all inflows and outflows, depending on the cash flow method chosen.
Either method works fine for businesses, but most will benefit from the fine details provided when all three cash flow segments are listed.
Free flow cash, also known as FCF, is the amount of cash that your business has to pay for:
Higher FCF means that the business has money to repay its debts and take advantage of growth opportunities. You'll find the FCF of a business by subtracting the total of your capital expenditures from your operating cash flow.
Businesses with high FCF will want to leverage the cash that they have at their disposal to begin paying down debts and even expand the business.
FCF means your business has the financial freedom it needs to keep growing. However, if this figure is too low, it means that you need to increase each type of cash flows listed above to bring more money into the business.
If you cannot generate more revenue, it may be wise to begin reducing your expenditures.
Understanding each type of cash flows is only possible with analysis. Business owners and stakeholders should analyze reports and statements because they’ll help you understand:
f you assume that your business is doing well and has strong financials, you put your business at risk. The only way to know the true financial strength of a business is to go through each type of cash flows and ensure more money is coming into the business than is going out.
When cash flow falls into the negative, you’ll need to either reduce expenses or seek out financing.
Now that you know the types of cash flows, it’s important to be able to easily analyze the three types of cash flows. One of the best options is to use software to look through your cash flow and make your data easy to read.
Cash Flow Frog offers charts, graphs and reports to help you understand:
Proper analysis of your data will make it easier for you to make adjustments to keep your business financially stable.
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