Changes to Cash Flow

Definition of Cash Flow: Cash flow is the net amount of cash and cash equivalents being transferred into and out of a company.
Cash Flow Statement: This is a financial statement that provides information about a company’s cash receipts (cash inflows) and cash payments (cash outflows) during a particular period.
Three Sections of Cash Flow Statement: The cash flow statement is typically divided into three sections: operating activities, investing activities, and financing activities.

Changes Impacting Cash Flow

Sales Revenue: An increase in sales revenue will increase the company’s cash inflows.
Cost of Goods Sold (COGS): A rise in COGS will increase expenses, thereby reducing the cash available for other operational activities.
Expenses: An increase in general and administrative expenses will result in cash outflows which may reduce the net cash available to the company.
Debt Repayment: When a company pays down its debts, cash decreases because cash is used to pay down the debt.
Depreciation and Amortisation: These are non-cash charges that reduce a company’s earnings but do not impact cash flows.

Positive Cash Flow and Negative Cash Flow: Positive cash flow indicates that a company’s liquid assets are increasing, thus enabling it to settle debts, reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against future financial challenges. Conversely, negative cash flow indicates more cash flowing out (expenses) than flowing in (income).
Factors Influencing Cash Flow: Changes in net income, changes in working capital, and changes in capital expenditures can impact the cash flow of a company.
Cash Flow Trends: A consistent increase in cash flow over time indicates that a company can generate more cash than it uses.
Importance of Cash Flow: Understanding changes in cash flow helps stakeholders and external parties understand a company’s financial health, potential risks, and opportunities for growth.

Managing Cash Flow: Effective cash flow management involves tracking cash inflows and outflows, forecasting future cash flow trends, and contingency planning.
Cash Flow Forecasting: Companies should regularly update their cash flow forecasts to deal with any changes proactively.
Improving Cash Flow: Companies can improve cash flow by increasing sales, reducing costs, speeding up invoice payments, extending payment terms with suppliers, or taking on investment or loans.