Cash Flow – Cash Flow within itself is a very much important and interesting term to everyone as it involves Cash. Cash Flow indicates the inflow and outflow of cash from Operational, Investment and financing activities including the changes in working capital over a period of time for a Company.
It is a matter of routine that the cash flow is prepared after close of monthly accounts along with the financial statements to review the quantum of Income from Operations, increase or decrease in the working capital and the net flow of cash from Investment and Financing activities. It gives an insight into the performance of the operating, investing and financing activities and thereby gives a scope to manage these activities as well. Mere preparing the Cash Flow does not carry any impact unless it is studied in detail by the management to check and compare the results of the operations whether they are going in line with the targets and goals of the organization giving scope to manage things properly.
Operational Income – It is obtained by adding non operational expenses and deducting the non operational gains back to the net profit after the end of an accounting period. Once operational income is known it becomes easy for the management to compare with the budgeted operational income and go into the reasons for the decrease if any of the same to avoid the forthcoming operational losses and correct the financial status of the organization.
Change in working Capital - Increase or decrease in the current assets and current liabilities also has an impact on the Cash. Any increase in the current asset or decrease in the current liability count for the less inflow of cash into the organization and vice versa. It affects the liquidity of the real cash within the organization.
Investment Activities - Acquisition or sale of investments into other companies effects cash. Obtaining a share in other companies with a view to share their profits or to disinvest from other companies’ holding which does not earn profits is also a key factor in deciding the overall profitability of the Company. The return on investment analysis is to be made before making any decision to invest or otherwise in other companies for maximizing the profitability of the organization.
Financing Activities – Increase and decrease in Loans and advances obtained from financial institutions and banks and the movement of retained earnings form part of the financing activities. To manage and secure cash for the activities the net financing activities must generate net inflow unless the profits are extraordinary.
To sum up management of cash flow plays a vital role in the management of funds of the organization and should be managed constantly and regularly to maintain the ongoing process of an organization and to avoid any unforeseen and long term risks in running the organization.
Written by:
M. K. MOEENUDDEEN, M.Com. AICWA.,
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