Finance simply refers to the arrangement of funds. All of the firm’s assets are need to be financed. Some of the assets are acquired periodically, some on a recurring basis. Similarly, funds to finance these assets are acquired on a periodic as well as recurring basis. It is convenient to conceptualize the acquisition and use of these funds as flowing through a cash box. Furthermore, the acquisition and use of cash can be viewed as occurring in a cyclic fashion.
Cash Flow Cycle
For an existing firm there is no starting or ending point in a cash flow cycle. The cash flow cycle determines the movement of cash into and out of your business. It helps the financial manager to make decisions related to finance i.e. through cash flow cycle the manager is able to know the exact amount of money that he has at hand at any point and he can forecasts the future expenses.
Cash Outflows
Outflows can be occurred on a periodic as well as on a recurring basis. All the expenses which include miscellaneous expenses, wages expense, selling and administrative expenses, general expenses, purchasing of raw materials etc are of recurring nature. Investing in fixed assets, loan payments, and profits or dividends declaration, all these come in periodic outflows of a firm. Remember cash outflows generate cash inflows for a firm.
Cash Inflows
The cash which is generated by the outflow activities is considered to be the revenue or inflow of a company or a business. Very few firms make sales on “Cash & Carry” basis, follows a conservative approach but mostly in typical situations, firms do grant credit. Whenever a firm has sufficient money on hand after subtracting interest, amortization and depreciation charges and taxes, rather than having that extra money as an idle or free funds, they invest in marketable securities.
Importance of Cash Flow
Cash flow is of vital importance for any firm as it determines the business’s solvency. Cash flow finance is the measure of success or failure of any organization. At any given point in time the financial manager needs to make sure that sufficient cash is on hand to meet cash outflow requirements. In simple words, cash flow is the difference between inflow and outflow of money in any firm.
Financial Statements
Financial statements include income statement that specifies the company profits over a year and balance sheet has the details of all assets and liabilities, from which annual reports are made.These reports are then given to shareholders as they are interested in predicting the amount of cash flow of a company in the future.
