The concept of cash flow, its composition and in ensuring circulation of capital
In a market economy the constant circulation of funds both within the enterprise and across the economy as a whole is an objective condition of their viability. As part of this cycle are the cash receipts and cash expenditures entities. Money displays the relationships between stakeholders of production, distribution, consumption, and therefore has its own specific leverage on the progress and results of production and business enterprises. This is what suggests cash management component of financial management.
Cash flows - inflows and outflows of cash and cash equivalents as a result of industrial and economic activity.
Cash used for financing current operations and include cash on hand and funds on bank accounts of enterprises. By cash equivalents include short-term investments that can be converted into cash and have an insignificant risk of changes in value. These include securities with a maturity of three months (treasury bills, certificates of deposit, etc.).
Information on the cash flow reflects the company form number 3 "cash flow statement".
Effectiveness of cash flow is defined by its impact on the solvency of enterprises, turnover rate of working capital, funds raised and payables, and ultimately the profitability of the company and its competitive position. The following sections of the manual will address methods of calculation of these indicators.
You can select areas such cash flows:
• reimbursement of costs of production and sale of products and for services received;
• financial obligations to the state, banks and other companies;
• Formation of funds of funds;
• providing financial and investment operations.
Given the multidimensional nature of enterprises, and hence cash income and expenses, they must be classified according to certain criteria.
According to the Law of Ukraine "On Amendments to the Law of Ukraine" On taxation of income pidpryyemstv99 number 283/97-VR distinguish gross revenues and gross expenditures.
Gross income - the total enterprise revenue from all activities, resulting in cash, tangible or intangible forms.
Gross costs - the amount of any expenses in cash, tangible or intangible form, performed as compensation for the cost of goods and services purchased for use in their own business.
Thus, in the industrial and business enterprise together with cash carries no monetary transactions, ie, those that do not require the use of cash or cash equivalents. For example, barter, core funding under financial lease commitments convert to equity. Such operations are not included in the cash flow statement.
The difference between the total amount of gross income and gross expenditure is net cash flow. This is one of the most important financial ratio. If the net cash flow is negative, it means that the company is on the verge of bankruptcy. The presence of positive cash flow allows the company to form a fund of funds for its further development.
Depending on the activities distinguish cash flows from operating, investing and financing activities.
Operating activities - is the main activity of the company associated with the production and sale of products (services, works), provides the bulk of revenue is the main purpose of creating the company.
Investment activity - a combination of transactions on purchase and sale of long-term (non-current) assets and short-term (current) financial investments that are not equivalent to cash.
Financial activity - a set of transactions that result in changes in the size and composition of equity and debt.
The assignment of cash flows to the corresponding group depends primarily on the nature of business enterprises. For example, investing in securities generally are the investment activities of the company, but is the main (operating) activities of an investment company. If a transaction includes amounts due from several activities, these amounts should be distributed between the respective activities. For example, the repayment of the company reflects God as a part of financial activities, and interest payments - in the operations.