financialtreat – will explain What is Cash flow? Check out the full discussion for you! Which you will get in the following article. Let’s look at this article carefully!
If you feel that your monthly salary is running out quickly, it seems that you need to evaluate your financial management. Maybe cash flow is one of the things you need to learn.
Cash flow is a cash flow statement. Because of the name of the report, of course it contains details of the incoming and outgoing financial flows. Cash flow is not only important for personal financial management, but also business or organization. If you want to understand more, check out the following explanation, yes!
What is cash flow?
Cash flow is a method to record the income and expenses of both companies and individuals. In recording money flow, the main information process is where the money adds up and where the additional money comes from.
Cash flow statements include money derive from investments, profits, receivable payments and others. As for individuals, money flow is a record of salary, commissions, or also from the distribution of dividends of a company.
Furthermore, cash flow is an indicator to evaluate performance as well as how well the company is experiencing growth year after year. To perform this function, we need free money flow.
Free cash flow is a report that shows how much funds are left over after a company incurs costs for opening a new branch, paying off debt or distributing dividends to shareholders.
We can also use money flow to measure the value of the investments we make. By utilizing the concept of discount cash flow, investments can be made after assessing how profitable the returns from investments are.
Well, here we know the term discount cash flow. Discount cash flow is an estimate of the profitability of an investment activity. The reference in this calculation is the calculation of future values which are then convert to present values. If the present value is higher than the amount of investment money, the sign is worth considering.
Types of income and expenses in money flow
After knowing what it is and activities in it, we will discuss about the type of income and expenditure. As one of the main components in cash flow, income has 3 types of records, consisting of:
1. Active income
An example of active income it is all income receive, namely salary, operating profit, bonuses and others. The point is that active income is the type of income that to get it we have to work.
2. Passive income
As the name implies, passive income does not require us to work all the time to get it. Including among them, it is royalties from the use of music, book sales or rent payments from the house we rent.
3. Investment income
Almost similar to passive income, investment income specifically includes only dividends from stocks and the sale of valuable assets that we have.
Cash flow expenses
There are 4 types of production that every month we definitely do. For more details, see the summary below:
This type of expenditure has one of the functions just in case. We can save money in the bank or open a deposit account to secure our money.
2. Fixed mandatory expenses
The continuity of this mandatory fixed expenditure has its own urgency. Because usually the expenditure must remain in contact with the payment of taxes, insurance and other installments with prior approval.
3. Spending is inevitable
One example of money flow is the expenditure of consumption for daily needs. It can be internet fees, building rent or gasoline money.
4. Additional expenses
Out of basic needs, additional expenses include creative activities such as traveling, buying desired items and so on.
How to make cash flow for business activities
Judging from its use, how to calculate this flow there are two, namely for business activities and for personal needs. Well, below is how to calculate money flow for business activities.
1. Record all incoming and outgoing funds
The first step to making a money flow record is to ensure that all activities where money comes in and out are well documented. So that what will be recorded in the reporting is available everything.
2. Calculating the rise or decrease of cash
After recording all of the above activities, the next step is to recap on the rise or decrease of cash. To perform this task, we can look at the balance sheet as well as the money flow statement.
3. Calculate the net cash for operational, investment and funding activities
Basically, this process is an activity to separate the 3 activities from the general activity. An example of investment activity for cash flow is the purchase of long-term assets such as buildings and vehicles. Funding activities include equity, debt and dividend payments.
4. Calculate the results of all three cash flow activities
After calculating operational, investment, and funding activities, the next step is to collect the results to get the difference from the cash balance at the beginning of the current period. From there it can be known whether the company is getting a positive or negative value.
How to make cash flow for personal needs
After knowing how to make cash flow for business activities, can you apply it for personal purposes? It turns out that the cash flow recording method is a recording that can also be used for personal purposes. Here is an example of cash flow for personal use.
1. Record expenses and income
More or less similar to the method used in a company, a person who wants to make money flow must make sure what he will write on the cash flow statement is fully available.
2. Record all obligations held
Installments or debt payments must be clearly known through this step. Whether it is laptop installments, credit card payments or bank debt. All forms of obligations that we have to pay must be well documented.
3. Estimating the value of assets owned (so that total wealth is known)
Individual assets can be balances in bank accounts, inheritance, investments or moving and immovable assets such as cars and houses. From this we can know the total wealth we have by subtracting liabilities from the value of assets.
4. Perform money flow calculations
On individual use, recording cash flow is an effective way to track financial activity relatively easily. Because of this step, users only need to record income and expenditure activities and then see if the results are negative or positive. So that the financial decisions of an individual will be more planned.
Cash Flow activity
Cash flow statement or cashflow itself consists of 3 activities. what are the activities, examples of cash flow that are usually used?
a. Operating Activities
Operating activity is a cash flow statement consisting of the company’s operational activities. in other words, this activity can be obtained by including the value of the influence of cash / bank on transactions involved in determining net profit.
For example, the sale of goods and services from customers, the purchase of supplies, or equipment whose age is estimated to be less than a year, debts to suppliers and other operational expenses.
b. Investment Activities (Investing Activities)
This investment activity is relate to money flow activities resulting from the sale or purchase of fix assets. or the activity of entering the value of transactions affecting cash or banks for investment activities in assets whose age is estimate to be more than one year. For example, the purchase/sale of fix assets or other long-term investments.
c. Financing Activities
As the name suggests, funding activities are cash activities that come from the addition of company capital. To calculate this activity, you can enter the value of the addition or reduction of cash derive from the owner’s long-term liabilities and equity. Such as initial capital deposits, bank or bond debt and stock issuance.
Cash Flow Statement Method / money Flow Report
There are two methods to make an example of a money flow statement or money flow is the direct cash flow method and the indirect cashflow method.
In the example of the direct method cash flow formula is a method of creating money flow statements by grouping operating activities into various categories. For example, operational activities are distinguishe by their own accounts such as depreciation expense accounts, amortization expenses, profits, and losses, debts, and so on. So that this method is easier to understand and can provide complete information in decision making.
To create a direct method of money flow, you need to prepare a bank cash book and a small cash book. Next you can choose to cross-check between bank cash books, bank statements, bonggol checks or small cash books.
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Unlike the direct method, the indirect money flow method formula focuses on the difference between net income and money flow from operating activities. Indirect methods show the relationship between income financial statements, balance sheets and money flow (cashflow).
Well because the data is already available directly in the company, this method is cheaper than the direct method. In this method, operating money flow, investment money flow and funding cash flow are arrange base on income statements and balance sheets.
So, that was the explanation of the meaning of money flow to how to make it. if conclud, cash flow is a summary of expenses and income in a certain period of time. by understanding money flow, then you also try to keep your financial condition healthy. Good luck!