CASH INFLOW AND OUTFLOW What is Cashflow? • Cash Flow (CF) is the increase or decrease in the amount of money a business, institution, or individual has. In finance, the term is used to describe the amount of cash (currency) that is generated or consumed in a given time period. • The cash flow statement shows the cash moving into a business, called the inflows, and the cash moving out of a business, called the outflows. The statement of cash flows is divided into three categories, cash from or used in operating activities, cash from or used in investing activities, and cash from or used in financing activities. CASH OUTFLOW • Cash outflow is the amount of cash that a business disburses. The reasons for these cash payments fall into one of the following classifications: Operating activities. Examples are payments to employees and suppliers. Investing activities. Examples are loans to other entities or expenditures made to acquire fixed assets. Financing activities. Examples are payments to buy back shares or pay dividends. TYPES OF CASH OUTFLOWS • Cash outflow is the amount of cash that a business disburses. The reasons for these cash payments fall into one of the following classifications: • Operating activities. Examples are payments to employees and suppliers. • Investing activities. Examples are loans to other entities or expenditures made to acquire fixed assets. • Financing activities. Examples are payments to buy back shares or pay dividends. • These general categories of cash flow are located within the statement of cash flows, which is one of the financial statements that a business produces. The amount of cash outflows revealed in the statement of cash flows are for the time period covered by the statement. CASH FLOW STATEMENT • In financial accounting, a cash flow statement, also known as statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and out of the business. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow statements. CASH INFLOW Types of Capital • Here are the top four types of capital in more detail: • Debt Capital • A business can acquire capital through the assumption of debt. Debt capital can be obtained through private or government sources. Sources of capital can include: friends, family, financial institutions, online lenders, credit card companies, insurance companies, and federal loan programs. • Individuals and companies must typically have an active credit history to obtain debt capital. Debt capital requires regular repayment with interest. Interest will vary depending on the type of capital obtained and the borrower’s credit history. Equity Capital • Equity capital can come in several forms. Typically distinctions are made between private equity, public equity, and real estate equity. Private and public equity will usually be structured in the form of shares. Public equity capital raises occur when a company lists on a public market exchange and receives equity capital from shareholders. Private equity is not raised from the public markets. Private equity usually comes from select investors or owners Working Capital • Working capital includes a company’s most liquid capital assets available for fulfilling daily obligations. It is calculated on a regular basis through the following two assessments: • Current Assets – Current Liabilities • Accounts Receivable + Inventory – Accounts Payable • Working capital measures a company's short-term liquidity—more specifically, its ability to cover its debts, accounts payable, and other obligations that are due within one year. Trading Capital • Trading capital may be held by individuals or firms who place a large number of trades on a daily basis. Trading capital refers to the amount of money allotted to buy and sell various securities. • Investors may attempt to add to their trading capital by employing a variety of trade optimization methods. These methods attempt to make the best use of capital by determining the ideal percentage of funds to invest with each trade. In particular, to be successful, it is important for traders to determine the optimal cash reserves required for their investing strategies. Capital vs. Money • At its core, capital is money. However, for financial and business purposes capital is typically viewed from an operational and investment perspective. Capital usually comes with a cost. For debt capital this is the cost of interest required in repayment. For equity capital this is the cost of distributions made to shareholders. Overall, capital is deployed to help shape a company's development and growth.
