• HDFC securities
• 23 Aug 2018
• Knowledge Centre

Cash is one of the most crucial and significant assets of any business. In that sense, cash flow means to assess the direction of money, i.e. the quantum of money that is moving (flowing) in and out of your business in a month. The flow of cash takes place both ways. Cash comes in from customers or clients who are buying your products or services, and cash goes out of your business in the form of payments for expenses like rent or mortgage, in monthly loan payments, payments for taxes, etc.

 

What is a Cash Flow statement?

 

A cash flow statement often called the statement of cash flows is a financial statement which summarizes the amount of cash or cash equivalents that enter and leave the company or business. It helps measure how well the company manages its cash position, how they generate cash to pay the debts and how they fund its operating costs. In simple words, a cash flow statement complements the balance sheet and the income statement of a company’s financial reports.

 

Why is Cash Flow important?

 

Understanding cash flow helps you understand the condition of your business. If more cash is going out than coming in, it indicates that your business isn’t profitable and might be in danger. On the other hand, if more money is coming in your business than is going out, the stability and profitability of your business is assured.

 

In order to analyse this inflow and outflow of cash, you need to prepare a cash flow statement. As mentioned above, this report or statement is concerned with the flow of cash that comes in and goes out of the business. It helps you understand the business aspects better by breaking the analysis down to operating, investing and financing activities. A cash flow statement is a good analytical tool to measure the financial viability of your business, especially in the short term.

 

This means that through this statement, you can assess your ability to pay your short-term debt obligations, bills, etc. Cash flow is essentially divided into three major activities:

 

• Operating Activities: Includes activities that take place in a day to day order of the business.
• Investing Activities: Includes any external investments undertaken by the firm and the interest/ income received thereon. For e.g. Interest on debentures of other companies, etc.
• Financial Activities: Includes loan servicing obligations, payment obligations, etc.