Business — Banking — Management — Marketing & Sales

The Concept and the Importance of the Cash Flow Management

Category: Financial Control Management

The three most important financial indicators for any company’s operations are:

— Sales revenue

— Net Income

— Cash Flows

The amplitude of these key indicators determines the viability of the business and at the same time reveals the major problems of it.

The funds flow and the relationship between the operational, investment, and financial activities of the company is depicted by Cash Flow Statement. The concept of Cash Flow can be generally comprehended as a Cash Reservoir, the use of which is directed by the management of the company. As cash flows into its reservoir, management has a degree of discretion as to where to direct it. This discretion depends on the amount of cash already committed to such outlays as dividends, inventory accumulation, capital expenditures, or debt repayment. The total cash inflow also depends on management’s ability to tap sources such as equity capital and debt. The noncommitted cash is referred to as Free Cash Flow.

The typical Cash Inflows for any business that contribute to the «replenishment» of the Reservoir are:

— Cash sales;

— Collection of receivables;

— Advances received from suppliers or clients;

— Disposal of fixed assets and LT investments;

— Income from investments;

— Loans and credits;

— Owners’ contribution to equity;

— Grants received;

— Miscellaneous cash inflows.

The common Cash Outflows are:

— Cash acquisitions;

— Payments to suppliers;

— Advances paid;

— Salaries, social securities, and medical insurance;

— Payment for rented facilities;

— Repairs, renewals, and maintenance;

— Taxes and penalties;

— Assets and financial investments acquisition;

— Dividends paid;

— Repayment of credits and loans;

— Sponsorships and social sphere outlays.

There are a series of differences between the Profit and Cash Flow:

Profit includes Revenues and Expenses that do not require cash as it is recognized on the Accrual Basis;

Revenues are booked on the delivery of a specific product or services irrespective to the fact that cash is collected or not;

Two categories of costs occur in the business reality:

— Cost incurred;

— Cost applied;

Income is representative for the level of Sales recorded by the company and only those Costs are applied that are linked to the production sold or services provided;

On the other hand, a part of operational costs is held in inventories or are kept in accounts for several accounting periods (prepaid expenses, depreciation, etc.);

Cash Flow is based on events that are not specific for the Profit, e.g. pay-offs of liabilities, credits applied, advances received from suppliers, payment of miscellaneous taxes, payment of dividends etc.

Except for transactions involving the raising of the money form external sources or the investment of money in long-term assets, almost all cash flows relate to, and depend on Sales. Through the analysis of Sales a range of particularities of the business are revealed:

— The past direction and trend of sales volume;

— Enterprise share of the market;

— Industry and general economic conditions;

— Productive and financial capacity;

— Competitive factors.

These factors must generally be assessed in terms of individual product lines that may be influenced by forces particular to their own markets.

The Cash Flow Management includes the following sections and covers the main aspects of the Financial Management of the company:

— Cash Flow Accounting;

— Cash Flow Analysis;

— Cash Flow Budgeting.

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