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What is Cash Flow?

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Cash flow refers to the movement of cash into and out of a business over a specific period, typically a month, quarter, or year. It represents the net change in a company’s cash position resulting from its operating, investing, and financing activities.

Cash flow is crucial for the financial health and sustainability of a business. It allows companies to meet their financial obligations, invest in growth opportunities, and generate returns for shareholders. Positive cash flow indicates that a company is generating more cash inflows than outflows, while negative cash flow indicates the opposite.

Cash flow can be classified into three main categories:

1. Operating Cash Flow: Operating cash flow refers to the cash inflows and outflows resulting from the company’s core business operations. It includes cash received from customers, cash paid to suppliers and employees, and other operating cash flows such as interest received or paid and taxes paid. Operating cash flow is a key indicator of a company’s ability to generate cash from its day-to-day operations.

2. Investing Cash Flow: Investing cash flow represents the cash inflows and outflows related to the acquisition or sale of long-term assets and investments. It includes cash received from the sale of property, plant, and equipment, proceeds from the sale of investments, and cash paid for the purchase of assets or investments. Investing cash flow reflects the company’s capital expenditures and investment activities.

3. Financing Cash Flow: Financing cash flow encompasses the cash inflows and outflows associated with the company’s financing activities. It includes cash received from issuing shares or borrowing funds and cash paid for debt repayment, dividend payments, or share repurchases. Financing cash flow indicates how the company raises and uses funds from investors and creditors.

The statement of cash flows, also known as the cash flow statement, provides a detailed breakdown of the cash inflows and outflows within each category. It helps stakeholders assess a company’s ability to generate cash, meet its financial obligations, and support future growth and investment.

In South African accounting, the preparation and presentation of the statement of cash flows follow the International Financial Reporting Standards (IFRS) as adopted by the South African Institute of Chartered Accountants (SAICA).

References:

1. International Financial Reporting Standards (IFRS), International Accounting Standards Board (IASB), available at: https://www.ifrs.org/

2. SAICA website – https://www.saica.co.za/ (South African Institute of Chartered Accountants)