Types of cash flows
Three types of cash flows
It is customary for entrepreneurs to divide the cash flow into receipts and disposals and compare: if the amount of expenses is greater than the amount of receipts, then the month is unsuccessful, and if vice versa, everything is fine. This is the fastest way to assess the state of affairs in a business. However, it is not the most accurate, since a lot depends on what the money was enough for.
For example, in one month they overpaid for the maintenance of the office – they updated the form of employees, but at the end of the month there was not enough money for basic expenses – salaries and rent.
In another, they spent money on launching a new production line. The difference between income and expenses was negative, but rent, salaries and other regular obligations were closed.
If each month is evaluated by the total amount of expenses and incomes, then they will turn out to be negative.
However, in terms of activities, the minus in the first month is “bad”, since the main items of expenditure are not provided with money on time, and the second month is “good”, because all the main obligations are closed. And later the new shop will bring additional profit.
To understand how this works, let’s divide the cash flow by type of activity and consider each separately. There are three in total:
A report that records actual receipts and disposals by type of activity – a cash flow statement (DDS) will help to understand the topic. This is how it looks like:
Click to enlarge
Example of a consolidated cash flow statement
Operating cash flow
An operating activity is everything a business does to achieve its primary purpose. Each business has its own: for a restaurant it is the preparation of delicious food, for a furniture factory it is the production of tables, chairs and cabinets, and for a legal agency it is the preparation of documents and representation in court.
To achieve the goal, every business hires staff, purchases raw materials, produces goods or services, promotes and sells them. The costs of these processes are regular and require monthly payments. All this helps to produce a product that customers buy, and money flows into the company. So, the expenses and receipts from the main activities of the company add up to the operating cash flow.
This is a key cash flow. It ensures the stable financial position of the company. And when there is enough income from customers for operating systems in existing retail outlets, then the rest can be directed to business development.
Operating cash flow income includes customer payments, including advances, as well as returns from suppliers for the company’s core business.
And here are the items of disposals that can be included in operating cash flow:
Returns to customers
Purchase of goods, raw materials
UTII or STS 6%
Staff salaries and payroll taxes
Search, recruitment and regular training of personnel
Office and retail space rental
Maintenance of office and retail outlets
Commissions for receiving cash
Depending on the business, something can be removed or added.
Operating cash flow can be:
positive – income from customers is enough to close all the obligations of the business;
or negative – the money received this month is not enough to pay the obligations.
If you do not plan the operating cash flow, you can get into a cash gap.
For example, at the beginning of the month, we estimated business expenses on a napkin and decided to increase the advertising budget. This month there was enough money for everything, but not next month. It turned out that the extra money spent on advertising was needed to pay for three new employees hired at the end of the month.
It can be seen that in February the payroll and the payroll tax increased, and in the same month the advertising budget was increased.
As a result, the calculation of cash flow from operating activities helps the entrepreneur answer several questions:
Are there enough funds to ensure the uninterrupted operation of existing outlets or do you need to find some additional amount? We estimate the difference between the planned expenses and income in terms of operating cash flow.
What amount of income must be provided to avoid a cash gap? We estimate the amount of expenses for operating activities.
Is there enough own funds to buy expensive equipment, an office or invest in a new direction without the threat of operating activities? We estimate the difference between the planned expenses and income in terms of operating cash flow, the accumulated total over a period of several months.
In order for the company to be financially stable and able not only to ensure the operational work of the business, but also its development, it is necessary to create a positive difference between income and expenses for the operating activity. If this difference grows from month to month, then the business becomes more stable.