What is an Example of a Cash Flow?

Cash flow is an integral part of any business and forms a critical management tool. It refers to the increase or decrease in the amount of money circulating in a company. Cash flow is a strong predictor of a company’s financial status. Business owners use cash flow to determine how money is generated or used to run the company in a given time frame. It is reported on the firm’s cash flow statement. Several types of cash flows play an essential role in running the daily operations of a business and performing financial analysis.

Types of Cash Flow

There are four types of cash flows: operating activities, cash flow, free cash from the equity flow, free cash flow from the firm, and the net change in cash.

Operating Activities Cash Flow

Operating activities and cash flows are the core revenue-producing tasks of the company. They refer to the cash generated by a firm’s core business activities, including sales, purchases, and expenses related to daily operations. Money generated from operating activities does not include cash from the investment. It is usually found on the statement of cash flow of a company. The cash from operating activities, as found in the statement, includes money used and cash generated from various business activities. The operating activities may include:

• Receipts from sales of goods.
• Payment of interest and income tax.
• Payments of supplies of goods and services.
• Payments of wages to employees.
• Rent payments.
• Other operating expenses that a company may incur.

Investment companies also generate receipts from the sale of loans or equity, which form part of the cash flow from operating activities.

The company’s chief financial officer may present cash flow operating activities through a direct or indirect presentation.

Direct Presentation

Cash flow operating activities are presented as a list containing cash in from sales and cash out for capital expenditures. Although the direct presentation of cash flow is simple, it is rarely used.

Indirect Presentation
Operating activities’ cash flow is a reconciliation from profit to cash flow. During reconciliation, companies use different profits, including operating profit, profit from tax, or net income, to determine operating cash flow from operating activities.

Free Cash from Flow of Equity

Free Cash from Flow of Equity (FCFE) refers to cash available after a company reinvests into the business. It is cash from investing activities and includes uses and sources of money from firms’ investments. Free cash flow from equity is the amount of money a business generates and is potentially available for distribution to shareholders. It is calculated as cash generated from operations less capital expenditures. FCFE can be calculated from the statement of cash flows,

Free cash flow from equity also includes the sale and purchases of assets, loans advances to vendors or received from clients, and payments made or receipts from mergers and acquisitions.

The change in cash from investment activities is considered a cash-out. Cash-in occurs when a company disposes of an asset to increase circulating money. Cash-out occurs when a company utilizes funds to acquire new equipment, buildings, and securities.

Free Cash Flow from the Firm (FCFF)

FCFF refers to cash flow that is available to all investors of a company, and it includes both equity and debt. It is the amount of money available to all debt and equity holders after operational expenses, investment in working capital, and capital expenditures are made. It results from financing activities that lead to changes in the composition or size of the equity capital or borrowing of the entity. Free cash flow from the firm includes cash flows associated with repayment and borrowing bank loans. It is also associated with buying and issuing shares.

Additionally, the payment of dividends is also treated as an FCFF. FCFF is used in financial modelling to establish a company’s enterprise value. It determines the amount of money that debt and equity holders can access.

The Net Change in Cash

The net change in cash is the change in cash flow from one accounting period to another. Businesses capture net change in the cash flow statements. The net change in cash is the summation of the money used by the firm in various operating, financing, and investing activities. It forms a reconciliation of cash position and connects to the balance sheet. This cash flow brings together the three financial statements and helps determine an increase or decrease in money for a given accounting period.

Conclusion

Cash flow provides critical information that helps management make informed decisions to regulate business operations. It shows the financial position of the company. Businesses cannot operate without cash and must closely monitor cash inflows and outflows to ensure their net money remains sufficient to cater for unexpended cash obligations. CFO must continuously analyze cash flow statements to gain insights into cash-related issues.