These are five of the top index funds to consider adding to your portfolio this year.
What is cash flow?
Cash flow represents the money coming in and going out of a company or organization during a specific accounting period.
Cash flow is an indication of whether a company is likely to remain solvent, and knowing how to improve cash flow is an important part of maintaining a successful business.
In computing cash flow, Incoming cash takes the form of:
- Sales of goods and services.
- Sales of assets.
- Loan proceeds.
On the outgoing side, cash flows out through:
- Operating expenses.
- Direct expenses.
- Assets purchased.
- Debt service.
At the end of an accounting period, if the closing balance is higher than the starting balance, the cash flow is positive and the company’s liquid assets are increasing. If the closing balance is lower, the cash flow is negative and the company’s liquid assets are decreasing.
Cash flow example
A breakdown of cash flow and its significant components are important to investors to gauge the overall health of a company. However, it’s essential to remember that high levels of cash flow do not necessarily equate to profit.
A cash flow statement provides relevant information for determining the quality of income and is divided into three categories:
- Operating cash flow — Cash flow related to day-to-day operation, which indicates whether a company is able to generate the necessary cash to maintain operations or even expand.
- Investing cash flow — Gains or losses from investments in the financial market, as well as cash flow adjustments relating to investments in equipment and other assets.
- Financing Cash Flow — Cash flow resulting from issuing cash dividends or stock, or adjusting loans.
Improving cash flow increases your liquid assets, making it possible to pay debts or re-invest in the company. There are several methods for increasing cash flow:
- Improving sales of goods and services, or increasing the selling price.
- Selling assets.
- Reducing operational costs.
- Collecting deferred payments faster, or refusing credit.
- Delaying payment of short-term liabilities.
- Drawing a loan.
The cash flow statement is useful for assessing the increase or decrease in a company’s liquid assets, and thereby helps to determine if it’s in a position to remain solvent or even grow.