Money is an important factor in the business. A firm should maintain a clear record about income and outing of money to evaluate and estimate their performance. A cash flow statement is a record, which records firms in and out flow of cash in detail. Monitoring, analysing and optimising the cash flow is called cash flow management.
Importance of cash flow management is explained below:
Indicators of cash flow management are as follows −
EBIT − It tells about earnings after leverage and tax expenses which are deducted. EBITDA tells about operating efficiency of a firm.
EBITDA = Net income + interest + depreciation + amortization
Free cash flow (FCF) − Cash available after meeting the external obligations.
FCFF = Net Income + Depreciation + interest (1-Tax rate) – Long term investments- investments in working capital
Free cash flow to firm (FCFE) − Cash available to distribute to its shareholders.
FCFE = Net income + Depreciation & amortization + changes in W.C. + CAPEX+ Net Borrowings.
Types of cash flows includes −
Cash generated from form operating activities is called operating cash flow. It may be day to day activities like raw material purchases, end product sales etc. Cash collected is recorded as accounts receivables. It is also termed as net cash flow.
Operating cash flow = cash inflow (operating activities) - cash outflow (operating activities)
Cash generated from investing activities is called investing cash flow. Investing may be long term or short term. It includes property, plant, equipment, intangible assets etc.
Investing cash flow = cash inflow (investing activities) – cash out flow (investing activities)
Cash generated by financial activities are called financial cash flows. It may be repaying capital, long term debt, stocks, bonds, cash receipts etc.
Financing cash flow = cash inflow (financial activities) – cash out flow (financial activities)