What is a cash flow and how to make one? (includes structure and example)

A cash flow (also known as a cash flow, cash flow, or cash flow ) is a financial document or report that shows the cash inflows and outflows that a company has had over a period of time determined.

Along with the income statement and balance sheet , cash flow is one of the three main financial statements that are used to financially analyze a company.

Being specific, the cash flow allows us to know how a company has obtained and spent its cash, and what is its available cash at the end of the period and thus, for example, to know if it can buy merchandise in cash or if it is necessary to request credit.

Cash flow allows us to know if a company is transforming its profits into cash and, therefore, if it is solvent.

In this article you will find:

  • What is a cash flow?
  • What is the utility or importance of a cash flow?
  • How to make a cash flow?
  • Summary

What is a cash flow?

A cash flow (also known as a cash flow, cash flow, or cash flow ) is a financial document or report that shows the cash inflows and outflows that a company has had over a period of time determined.

Examples of cash income are bill collection, return on investment, loans obtained, etc .; while examples of cash outflows are the payment of bills, the payment of wages, the payment of basic services, the payment of taxes, the payment of loans, the payment of interest, etc.

The difference between cash income and expenses is known as the balance, which can be favorable (when the income is greater than the expenses) or unfavorable (when the income is less than the expenses).

Something important to note is that, unlike the income statement , the cash flow shows the money that actually goes in or out of «cash»; for example, it records the payment for a purchase, but not the depreciation of an asset, which implies an expense, but not a cash outflow.

As for the periods of time covered by the cash flows of a cash flow, these are usually annual, although it is also common to find cash flows with monthly, weekly and even daily flows depending on the size of the company and its needs. .

Structure and example of a cash flow

There is no standard cash flow structure or format that all companies use alike; however, in general all cash flows are similar enough that anyone can compare the cash flow of one company with that of another.

A common structure and example of a cash flow is as follows:

  January February March April
INCOME        
Accounts receivable 34000 86200 88800 90800
TOTAL INCOME 34000 86200 88800 90800
         
EXPENSES        
Debts to pay 23500 49000 50500 51000
Administrative expenses 10200 10560 10800 11040
Selling expenses 6800 7040 7200 7360
Tax payment 3080 2710 3260 2870
TOTAL EXPENSES 43580 69310 71760 72270
         
CASH FLOW BALANCE -9580 16890 17040 18530

Some observations of this structure or example of cash flow are:

  • the difference between total income (or total cash income ) and total expenses (or total cash expenses ) gives us the cash flow balance , which is the cash that the company has available at the end of the corresponding period.
  • In this example, the cash flow balance for January was negative, which means that there were more expenses than cash income.
  • In this example, the periods covered by the cash flows are monthly (January, February, March and April).

Sometimes, in order to better control the cash flow balance, it is added to the following period, leaving the final part of the structure: balance + initial cash = final cash (available):

  January February March April
INCOME        
Accounts receivable 34000 86200 88800 90800
TOTAL INCOME 34000 86200 88800 90800
         
EXPENSES        
Debts to pay 23500 49000 50500 51000
Administrative expenses 10200 10560 10800 11040
Selling expenses 6800 7040 7200 7360
Tax payment 3080 2710 3260 2870
TOTAL EXPENSES 43580 69310 71760 72270
         
BALANCE -9580 16890 17040 18530
INITIAL BOX 0 -9580 7310 24350
FINAL BOX -9580 7310 24350 42880

Some observations of this structure or example of cash flow are:

  • the difference between total income (or total cash income ) and total expenses (or total cash expenses ) gives us the balance (or cash flow balance ).
  • the sum of the balance and the initial box gives us the final box .
  • the final cash amount becomes part of the initial cash for the following period.

Also, when a company has obtained a loan and then pays fees for it, the loan becomes part of the cash income, and the fees become part of the cash outlays, but for a better analysis these are usually included in the debt service item .

For example, assuming that the company in the cash flow example we’ve been looking at got a loan of $ 40,000 in January, and then paid monthly fees of $ 5,000 for it, the new cash flow structure would be as follows:

  January February March April
INCOME        
Accounts receivable 34000 86200 88800 90800
Loans 40000      
TOTAL INCOME 74000 86200 88800 90800
         
EXPENSES        
Debts to pay 23500 49000 50500 51000
Administrative expenses 10200 10560 10800 11040
Selling expenses 6800 7040 7200 7360
Tax payment 3080 2710 3260 2870
TOTAL EXPENSES 43580 69310 71760 72270
         
ECONOMIC NET FLOW 30420 16890 17040 18530
Debt service   5000 5000 5000
NET FINANCIAL FLOW 30420 11890 12040 13530

Some observations of this structure or example of cash flow are:

  • The $ 40,000 loan is cash that goes into the business and becomes part of the cash proceeds.
  • The fees of US $ 5,000 that the company pays for the debt acquired become part of the cash outlays, but for a better analysis they are included in the debt service item .
  • the difference between total income (or total cash income ) and total expenses (or total cash expenses ) gives us the economic net flow (or economic cash flow ).
  • the difference between the net economic flow and the debt service gives us the net financial flow (or financial cash flow ).

Projected cash flow

As we have mentioned, the cash flow shows the cash inflows and outflows that a company has had during a determined period of time; however, it is also possible for a cash flow to show the cash inflows and outflows that a business expects to have for a given period of time.

In this case, the cash flow is known as the projected cash flow (or cash budget ) since it effectively shows a projection of the cash income and expenses that the company expects to have for a certain period of time, and not those that cash income and expenses that you have already had.

What is the utility or importance of a cash flow?

Along with the income statement and balance sheet , cash flow is one of the three main financial statements that are used to financially analyze a company.

Being specific, the cash flow, by showing us the cash inflows and outflows that a company has had during a certain period of time, allows us to know how a company has obtained and spent its cash, and what is its available cash at the end of the period and so for example:

  • determine how much merchandise can be purchased.
  • Determine if expenses need to be reduced (when there is a cash shortfall).
  • determine whether it is possible to buy in cash (when there is a surplus of cash) or it is necessary or preferable to apply for credit (when there is a shortage of cash).
  • determine whether it is necessary or preferable to collect in cash (when there is a cash shortage) or it is possible to grant credits (when there is a surplus of cash).
  • determine whether it is possible to pay off debts at their due date or if you need to ask for a refinance or new financing (when there is a cash shortage).
  • Determine if you have a sufficient cash surplus to be able to invest it, for example, in the acquisition of new machinery or in some asset or financial instrument.
  • Determine whether you need to increase available cash, for example, for an eventual investment opportunity.

For example, in the case of the cash flow example we saw earlier:

  January February March April
INCOME        
Accounts receivable 34000 86200 88800 90800
Loans 40000      
TOTAL INCOME 74000 86200 88800 90800
         
EXPENSES        
Debts to pay 23500 49000 50500 51000
Administrative expenses 10200 10560 10800 11040
Selling expenses 6800 7040 7200 7360
Tax payment 3080 2710 3260 2870
TOTAL EXPENSES 43580 69310 71760 72270
         
ECONOMIC NET FLOW 30420 16890 17040 18530
Debt service   5000 5000 5000
NET FINANCIAL FLOW 30420 11890 12040 13530

By way of analysis, we could say that the company has a surplus of cash (good liquidity), which could be used to purchase more merchandise or to invest in new machinery or in assets or financial instruments.

The cash flow is usually prepared by the finance or accounting area, or the company’s accountant at the time of accounting , or when required by the company’s managers to financially analyze it.

In the case of the projected cash flow, by showing us the future cash inflows and outflows that a company will have for a certain period of time, it allows us to know how a company will obtain and spend its cash, and what will be its available cash at the end of the period and so for example:

  • anticipate a future cash deficit (or lack) and thus, for example, be able to make the decision to seek financing in a timely manner.
  • anticipate a cash surplus and thus, for example, be able to make the decision to invest it in the acquisition of new machinery.
  • establish a solid basis for supporting a loan requirement, for example, by presenting the projected cash flow to a bank or financial institution.

The projected cash flow (or cash budget ) is usually made at the time of making the budgets of a company , at the time of requesting a loan (since it is usually a document that banks and other financial entities usually ask us to know if we will be able to pay the debt in a timely manner, and thus evaluate whether or not to grant us the loan), and at the time of making a business plan (since it is usually an important element of it).

How to make a cash flow?

To make the cash flow of a company it is necessary to know what the cash income and expenses have been during a certain period of time.

The cash income and expenses of a company are obtained by keeping the accounting of the company, which is why the cash flow is usually prepared by the finance or accounting area, or the company’s accountant; although in reality it can be prepared by anyone who has this information.

It is only a matter of including the cash income and expenses that the company has had in the corresponding items, and then subtracting the total cash expenses from the total cash income to obtain the available cash.

In the case of a projected cash flow, to do this it is necessary to have the projection of the income and cash outflows that the company is expected to have for a certain period of time, and it may be necessary to previously make other budgets.

Here is a simple example of how to make a projected cash flow:

Assuming a production or manufacturing company that has the following data:

  • Sales projections are: January: $ 85,000, February: $ 88,000, March: $ 90,000, and April: $ 92,000.
  • the projections for the purchase of supplies are: January: US $ 47,000, February: US $ 51,000, March: US $ 50,000, and April: US $ 52,000.
  • Sales are charged 40% in cash and 60% on 30-day credit.
  • purchases are paid 50% in cash and 50% on 30-day credit.
  • A loan is obtained from the bank for US $ 40,000, which must be paid in installments of US $ 5,000 per month.
  • administrative and sales expenses correspond to 20% of sales projections.
  • The projections for paying taxes are: January: US $ 3,080, February: US $ 2,710, March: US $ 3,260, and April: US $ 2,870.

To prepare the projected cash flow of this company, we must first prepare the accounts receivable budget since total sales are not collected the same month in which they are made, but 40% are charged the month in that are made and the remaining 60% the following month, and when preparing a cash flow, as we have mentioned, we must record the cash that actually enters or leaves the company:

Accounts receivable budget

  January February March April
Spot sales (40%) 34000 35200 36000 36800
30-day credit sales (60%)   51000 52800 54000
TOTAL 34000 86200 88800 90800

The accounts receivable are the sum of money that customers owe the company for products or services you bought them, but have not yet paid.

Once we have prepared the accounts receivable budget, we proceed to prepare the accounts payable budget since, likewise, purchases are not paid the same month in which they are made, but 50% are paid in the month in that are made and the remaining 50% the following month.

Accounts payable budget

  January February March April
Cash purchases (50%) 23500 25500 25000 26000
Credit purchases (50%)   23500 25500 25000
TOTAL 23500 49000 50500 51000

The accounts payable is the sum of money the company owes its suppliers for inputs or products received, but has not yet paid.

Finally, making sure we have all the necessary data, we proceed to prepare the projected cash flow.

Projected cash flow

  January February March April
INCOME        
Accounts receivable 34000 86200 88800 90800
Loans 40000      
TOTAL INCOME 74000 86200 88800 90800
         
EXPENSES        
Debts to pay 23500 49000 50500 51000
Adm. Expenses and sales 17000 17600 18000 18400
Tax payment 3080 2710 3260 2870
TOTAL EXPENSES 43580 69310 71760 72270
         
ECONOMIC NET FLOW 30420 16890 17040 18530
Debt service   5000 5000 5000
NET FINANCIAL FLOW 30420 11890 12040 13530

You can find other examples of how to make a projected cash flow in our articles: The Cash Budget and A Company’s Budgets .

Summary

A cash flow is a document or financial report that shows the cash inflows and outflows that a company has had (or will have in the case of a projected cash flow) in a given period of time.

Unlike the income statement , the cash flow shows the money that actually enters or leaves the company; for example, it shows the payment (money disbursement) that is made for a purchase, regardless of when it is made.

Cash flow ultimately allows us to know if the company has a deficit or a cash surplus (or if it is going to have a deficit or a cash surplus in the case of a projected cash flow) and so, based on it, to be able to make decisions.

Finally, cash flow is one of the main financial statements along with the income statement and the balance sheet

 

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