What is Cash Flows ?

This forecast is an important aspect of your planning and is an essential part of budgeting as it helps you to identify potential areas where a lack of cash may become an issue. It also offers you the opportunity to review and where necessary amend your planned expenditure.

Even profitable companies can fail if operating activities do not generate enough cash to stay liquid.

Regular monitoring and reviewing of your cash flow forecast is essential because you never know when your budget may be threatened or cut. You will be able to protect your original budget better if you already have arguments for why your budget should not be affected and exactly what the consequences will be if it is.

This can happen if profits are tied up in accounts receivable and inventory, or if a company spends too much on capital expenditure.

The better prepared you are, the more protected your budget will be in such circumstances. It also enables you to communicate accurately and objectively to senior management the consequences of any budgetary changes.

Investors and creditors, therefore, want to know if the company has enough cash and cash-equivalents to settle short-term liabilities.

In order for a set of financial statements to be complete the accounting profession includes a cash flow statement. Like all other financial statements it has to adhere to accepted accounting principles.

But liquidity only tells us so much. A company might have lots of cash because it is mortgaging its future growth potential by selling off its long-term assets or taking on unsustainable levels of debt.

The cash flow statement goes beyond what you include in your regular reports showing what cash has come in and what cash went out. A Cash Flow statement can be defined as a reconciliation of the differences between the:

Accrual basis balance sheet and Income statement and Cash flow.

To understand the true profitability of the business, analysts look at free cash flow (FCF).

This statement uses historic data and is usually dated at the end of an organization's financial year. In simple terms it shows how the final cash balance occurred, how much money flowed in and from where, and how much went out and why.

It is a really useful measure of financial performance – that tells a better story than net income — because it shows what money the company has leftover to expand the business or return to shareholders, after paying dividends, buying back stock or paying off debt.

The cash flow statement reflects a firm's liquidity. It includes only inflows and outflows of cash and excludes transactions that do not directly affect cash receipts and payments. Being a cash basis report, this financial statement details three types of financial activities: operating activities, investing activities, and financing activities.

Free cash flow = operating cash flow - capital expenditures - dividends (though some companies don’t because dividends are viewed as discretionary).

Provide information on an organization's liquidity and solvency and its ability to change cash flows in future circumstances.

For a measure of the gross free cash flow generated by a firm, use unlevered free cash flow.

Provide additional information for evaluating changes in assets, liabilities, and equity.

For a measure of the gross free cash flow generated by a firm, use unlevered free cash flow.

Improve the comparability of different organizations' operating performance by eliminating the effects of different accounting methods.

This is a company's cash flow before taking interest payments into account and shows how much cash is available to the firm before taking financial obligations into account

Indicate the amount, timing, and probability of future cash flows.

The difference between levered and unlevered free cash flow shows if the business is overextended or operating with a healthy amount of debt.

The valuable information and data a cash flow statement provides ensure it plays a key role in an organization's decision making. This is why it is essential for managers to have an appreciation of how it is compiled and how to interpret it.

The cash flow statement has been adopted as a standard financial report because it eliminates some of the problems that occur when trying to compare accounts that have been prepared using different accounting methods, such as various timeframes for depreciating fixed assets.