The importance of the concept of cash-flow for the business finance
Cash flow is the movement of money into or out of a business, an account or an investment. Normally, when the cash inflow is greater than the cash outflow it is a sign of a good financial situation because cash flow is essential for the survival of a business or even to any individual financial condition. If the company can meet its obligations and keep a healthy inflow of cash it has a healthy situation and the management of the company can invest most of its time in developing the company. There are 3 types of cash-flows:
Operating cash-flows, which is the money received or spent as a result of a company’s normal business activities. Investment cash-flows, which is the money received or spent through investing activities and thirdly the financing cash-flows, which is the cash received through debt or paid out as debt repayments. Example:
Imagine that you run a shoe factory. Having cash is necessary for your business to flow. If you have cash you can pay your suppliers, your employees and yourself on time and so keep the business flow. Therefore if you, as an individual, receive your pay check, you can pay for all your expenses (e.g. housing, food, utilities, insurance, etc). Here we are speaking about operational cash-flow. Another way of creating cash is if you opt for purchasing and selling assets. This is normally a long term issue that can help your business grow and might lead to a net worth increase. This is called investment cash-flow. There are companies that are specialized in this area that manage funds that invest and divest in property. Finally, a third option you have is financing cash-flows. This includes any cash which comes from loans or other types of other debt that allow you to finance your cash flow. It is also used to finance the down payments made of debts. Conclusion:
Based on the above, one understands the importance of...
Bibliography: Marques, Manuel de Oliveira, “A Importância do Correcto Entendimento do Conceito de Cashflow para a Análise e a Tomada de Decisões Financeiras”, Estudos de Economia, vol. IV, n. 4, Jul-Sept 1984.
Mónica Álvares Ribeiro
Please join StudyMode to read the full document