What is Cash Flow? Definition and Importance of cash flow

Definition of Cash Flow

This process of coming and going of money to a person is called cash flow. Cash flow means that we get to know the total income and total expenses of a person.

With cash flow it can be understood that where is a person coming from and where is he spending money?

What is Cash Flow? Definition and Importance of cash flow
What is Cash Flow? Definition and Importance of cash flow

Cash flow means what is your income and how do you spend it?

When your income and expenses are written by making two columns on a paper, in which the first column is the complete list of your income and the second column is the complete list of your expenses.

In this way, when the total of these two columns comes out, we get to know how much our total income is and how much is our total expenditure.

If our income is high and expenses are low then our cash flow is positive and if income is low and expenses are high then our cash flow is negative.

Accounting definition of Cash Flow

Cash flow is the movement of total cash income coming to a business within a particular time such as 6 months or 1 year, and out of the total expenditure of the business is called cash flow.

Cash Flow statement has two things.

  1. Incoming cash

Cash coming in a business such as money coming in the form of capital, money coming on sale, money coming from the credit and cash coming from loans is called incoming cash.

2. Outgoing cash

The money spent in business such as the money spent on making a product, the interest paid on the loan, the tax and the money spent in the machine, factory or office is called outgoing cash.

What is Cash Flow? Definition and Importance of cash flow
What is Cash Flow? Definition and Importance of cash flow

There are three Types of Cash Flow

  1. Positive cash flow

In business, if the incoming cash is more than the outgoing cash, then it is called positive cash flow.

2. Negative cash flow

Negative cash flow is just the opposite of positive cash flow, in that the incoming cash in the business is less than the outgoing cash.

3. Break even cash

The incoming cash in business and the outgoing cash in business are equal in Break Even cash.

Importance of Cash Flow

  1. A person is soon in debt due to spending more than income, so in normal life we ​​think that our expenses should not be more than income.

2. Similarly, it is very important to have a positive cash flow for the business, whether it is a small company or the biggest company.

3. You can also understand the importance of cash flow if we save money in our pockets after spending all the necessary expenses, then we have very good feeling and we are very confident.

4. An investor should always keep in mind that the cash flow of the company in which he is investing is positive or not, so that your money is not lost, so it is very important to have an understanding of cash flow.

How to create a Cash Flow statement

Cash flow statement is made with financial statement In which all the incoming cash coming in the current financial year is added from the opening balance of both the bank and the cash.

And all the expenses and other payments that are due that year like the outgoing cash are reduced.

Ex. Opening balance of cash in hand and cash at bank +(add) cash generated from operational activates +(add) cash from other sources

-(less) Total expenses done during the financial year.

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