The perception of cash flow is sometimes underestimated due to a lack of economic and financial understanding. Indeed, finance in general, and cash flow, in particular, are technical and intricating terms to comprehend. However, in this article, VNEXT Global - a top financial software development company in Vietnam, will provide overall insights about cash flow definition and types of cash flow, thereby guiding beginners to the very first steps in managing their cash flows.
1. The overall definition of cashflow
To effectively manage your company's financial situation, you must have a comprehensive understanding of cash flow.
Cash flow generally refers to the net balance of cash flowing into and out of a business at a particular period.
Continually, cash flows into and out of a business. When a retailer purchases merchandise, for instance, money leaves the business and flows to its suppliers. When a retailer sells an item from its inventory, cash inflows from customers. Paying employees or utility bills symbolizes a cash outflow from a business to its creditors. Collecting a monthly payment on a customer's transaction funded 18 months ago demonstrates incoming cash flow. The list continues.
Positive or negative cash flow can occur. Positive cash flow indicates that a corporation receives more cash than it expends. Negative cash flow shows that a corporation is spending more money than it is receiving.
Specifically, firms typically fall into one of the following three categories:
- Cash inflows (revenues) come after cash outflows (expenses) - in the most common case, most businesses will fall into this situation.
- Cash inflows come simultaneously as cash outflows - not many businesses fall into this situation.
- Cash inflows come before cash outflows - the least common case, it's also the most ideal case for the business.
After learning what cash flow is in general, let's examine some common types of cash flow in greater detail.
2. Four fundamental types of cash flow
There are numerous cash flow kinds, thus it is essential to have a thorough understanding of each. When someone mentions cash flow, they could be referring to any of the following terms; therefore, it is important to identify which cash flow term is being used.
Cash flow types include:
- Cash from Operating Activities does not include cash flow from investing. Cash is created by a company's primary business activities. This information can be found on the company's cash flow Statement.
- Free Cash Flow to Equity (FCFE) - FCFE is the amount of cash available after reinvestment back into the business (capital expenditures).
- Free Cash Flow to the Company (FCFC) - This metric presupposes that a corporation has no leverage (debt). It is employed within financial modeling and valuation.
- Cash Flow Variation - The change in cash flow from one accounting period to the next, at the bottom of the Cash Flow Statement.
Now you have a better understanding of what cash flow is and its most common types. You may now be wondering why cash flow and cash flow management are vital to a company's gross revenue. Discover more with our blogs: Why Is Cash Flow Management So Important For Businesses?
3. An Overall About Cashflow Management System
Unquestionably, cash flow plays a crucial function in business income. The management process has never been simple, therefore business owners should not take it for granted.
The cash flow management system is generally the process of measuring cash inflows and outflows. Specifically, it is the management, analysis, and optimization of the net revenue of cash received minus expenses. In a nutshell, it is the practice of managing your finances carefully in order to give your money enough time to grow.
To effectively manage cash, it’s a need to estimate the amount of money that will be available to cover expenses such as debt, payroll, and vendor bills.
However, the traditional method of cash flow management is only applicable for small businesses. It is vital for medium- to large-sized businesses to adopt a cashflow or financial management system because the old management method is outdated and has numerous shortcomings, including:
- Overload system and high bank volume
- Numerous exchanges and settlements
- Short of automation, standardization, and centralization
- Limit on analyzing the company’s financial cycle
- Insecure transactions
- Miscalculated financial choice
On the other hand, by providing real-time data on recorded resources, financial management in general and cash flow management, in particular, can be more efficient, for example:
- Ensure performance for the business’s daily operations
- Maximize the business’s profit
- Avoid digital fraud and theft by actively protecting financial data
As a result, businesses should consider adopting new technology in the financial sector, especially now that the internet security system is more vulnerable than ever.
You may also like this: An Interesting Case Study On Cash Flow Management: Amazon's Story
To summarize, cash flow refers to incoming and outgoing cash. A positive cash flow indicates an increase in incoming funds, whereas a negative cash flow indicates an increase in outgoing funds. The latter is not necessarily negative, as it may indicate that you are investing in growth. But if your spending becomes excessive, you will be unable to save for an emergency or pay your suppliers or lenders. Whether you are running a business or a household, it is essential to manage your cash flow. And to effectively manage your finance, it needs to have a logical and manageable financial system. If you are searching for a dedicated team to develop your own financial app, kindly consider VNEXT Global services - a top app development company in Vietnam.
If you are looking for a trusted IT partner providing software testing services, VNEXT Global is the ideal choice. With 14+ years of experience, we surely can help you to optimize your business digitalization within a small budget and short time. Currently, we have 400+ IT consultants and developers in Mobile App, Web App, System, Blockchain Development and Testing Services. We have provided solutions to 600+ projects in several industries for clients worldwide. We are willing to become a companion on your way to success. Please tell us when is convenient for you to have an online meeting to discuss this further. Have a nice day!