CASH FLOW - Difference between Revenue / Collection and Expenditure / Payment

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1. What is cash flow?
2. Why is cash flow important for a company?
3. What is the formula for calculating cash flow?
4. What are the types of cash flow?
5. What is the difference between operating cash flow and total cash flow?
6. How is cash flow used to assess the financial health of a company?
7. What can affect a company's cash flow?
8. How can a company's cash flow be improved?
9. Why is it important to take the cash cycle into account in the cash flow calculation?
10. What strategies can help a company better manage its cash flow?

What is cash flow?

Cash flow is a key metric for assessing the economic viability of a new venture. Cash flow represents the money flowing in and out of the company over a given period of time, usually monthly. It is important to take into account both cash inflows (receipts) and outflows (payments) when calculating cash flow. See the TIPS on difference between selling and collecting (see+) and the TIP of difference between expenditure and payment (see+).

To calculate the cash flow of a new company, the following steps must be taken:

1. Determine the period .... month xxx for example, I recommend you do this for the next 18 months.
2. Identify all cash inflows in the given period. These may include sales made, rental or lease income, among others.
3. Identify all cash outflows in the same period. These may include wage payments, rent or lease of work space, payments for production costs, tax payments, etc.
4. Subtract cash outflows from cash inflows to get the net cash flow. If the result is positive, it means that the company has more cash coming in than going out, which is a good sign. If the result is negative, it means that the company is spending more than it is generating and will need financing.

It is important to note that cash flow is not the same as company earnings. Profit is calculated by subtracting expenses from revenues, but does not take into account cash outflows or inflows. Therefore, A company may have book profits but be experiencing liquidity problems if it does not have enough cash to cover its expenses. It is essential for a new business to maintain a healthy cash flow in order to meet short-term financial obligations, such as paying employee salaries, rents and production costs. In addition, positive cash flow can also allow the company to reinvest in its growth and expand its business in the future.

Practical examples of cash flow calculations

Here are some practical examples of cash flow calculations:

• A company has revenues of $100,000 in a month. Of this revenue, $70,000 is paid in cash and the rest is credit sales. The company's total costs for the month are $80,000, of which $60,000 is paid in cash. The remainder will be paid in the following month. Ehe company's cash flow for the month is: 

• • Cash income: 70,000 USD
  • Cash costs: 60,000 USD

Cash flow = Cash income - Cash costs = 70,000 - 60,000 = US$ 10,000

• A company has earned revenues of $150,000 in one month, of which $120,000 has been received in cash and the remainder has been sold on credit. The company's total costs for the month are $90,000, of which $80,000 has been paid in cash and the remainder will be paid in the following month. The company has also invested $20,000 in machinery. The company's cash flow for the month is: 

• • Cash income: 120,000.
  • Cash costs: 80,000.

Investment in machinery: -$20,000 (as it is a cash outflow)

Cash flow = Cash income - Cash costs - Investment in machinery = 120,000 - 80,000 - 20,000 = USD 20,000

• A company has earned revenues of $200,000 in one month, of which $150,000 has been received in cash and the remainder has been sold on credit. The company's total costs for the month are $130,000, of which $100,000 has been paid in cash and the remainder will be paid in the following month. The company has also received a loan of $50,000. The company's cash flow for the month is: 

• • Cash income: 150,000.
  • Cash costs: 100,000.
  • Loan received: 50,000 (as it is a cash inflow)

Cash flow = Cash income - Cash costs + Loan received = 150,000 - 100,000 + 50,000 = US$ 100,000

There are three types of cash flow: the one we entrepreneurs are most interested in is the first and second!

• The free cash flow (also known as free cash flow): is the amount of cash remaining after a company has paid all its expenses and reinvested in its business. In other words, free cash flow measures the amount of cash that is available to the company to pay dividends to shareholders, repay debts, make acquisitions or invest in new projects. It can be found at calculated by subtracting the total expenses of the company (including payments for investments and payments for fixed and variable expenses) from the total revenues (sales receipts) of the company. This calculation can be done in different periods, preferably monthly, and can be used to assess the economic viability of the company and its ability to generate cash in the long term.

Cash flow from operations (CFO): is the cash flow generated by the company's core business activities, such as the sale of goods and services, collection of receivables, payment of invoices and payment of salaries. Es a financial indicator that measures the cash flow generated by the company's operations, i.e. the cash inflows and outflows generated through the company's productive or commercial activity, without taking into account financing. It is an important measure of the company's ability to generate cash through its core business. In other words, CFO refers to the amount of cash the company generates in its core business, such as sales and operating income, minus operating expenses, such as production costs, wages and taxes. This means that the CFO focuses on the cash flow that is generated in the day-to-day operations of the company, without taking into account cash flows related to financing, such as issuing shares or borrowing. The CFO is a an important indicator for measuring the financial strength of a company, as it shows the company's ability to generate cash through its day-to-day operations. A positive CFO indicates that the company is able to generate enough cash to cover its operating and financial expenses, while a negative CFO indicates that the company is spending more than it generates through its core business and may be at risk of insolvency. It is important to note that the CFO does not take into account capital expenditures, such as the purchase of fixed assets or the repayment of long-term debt, as these cash flows are related to financing and not to the day-to-day operations of the company.

Differences between free cash flow and operating cash flow

Free cash flow and operating cash flow are two different concepts used to assess the financial health of a company. The The main difference between the two lies in the elements included in their calculation.

• The operating cash flow refers to the money that a company generates through its operating activities, i.e. the difference between operating income and operating expenses. This indicator does not take into account investment and financing costs, such as the purchase of assets or the amortisation of loans.
• The free cash flowalso known as available cash flow, refers to the money that the company has available after all expenses, including payments for investments, have been paid. In other words, it is the cash that the company has available to invest in new projects, pay dividends to shareholders, pay debts, among others.

In a nutshell, the main difference between operating cash flow and free cash flow is that operating cash flow only takes into account the day-to-day operations of the company, while free cash flow includes investment expenditures, which provides a more complete picture of the company's ability to generate cash.

1. Investment cash flow: It is the cash flow generated by the company's investment activities, such as the purchase or sale of fixed assets, investment in new projects or the acquisition of other companies.
2. Financial cash flow: It is the cash flow generated by the company's financing activities, such as issuing shares, borrowing from banks or issuing bonds.
3. Total cash flow: What is the difference between operating cash flow and total cash flow?

The difference between operating cash flow and total cash flow is that operating cash flow refers to the amount of cash generated from normal business operations, without taking into account external financing, while total cash flow includes all cash flows, both operating and financial, including financing income and expenses. In summary, operating cash flow measures a company's ability to generate cash from operations, while total cash flow measures a company's ability to generate cash from all sources, including operations, financing and other activities.

How is cash flow used to assess the financial health of a company?

Cash flow is used as a key metric to assess the financial health of a company. A company that has a good cash flow is in a better position to survive in the short and long term.

To assess the financial health of a company, the following steps can be taken using cash flow:

1. Calculate operating cash flow: It is calculated by subtracting operating expenses from operating income. This gives you an idea of how much cash the company generated from its core activities.
2. Calculate free cash flow: After calculating the operating cash flow, capital expenditures (investments in fixed assets such as machinery, equipment, property) must be subtracted to obtain the free cash flow. This indicates how much cash the company generated after investing in its business.
3. Analyse the direction of cash flow: It should be analysed whether the company's cash flow is positive or negative. A positive cash flow indicates that the company is generating more cash than it is spending, which means that it is in a better position to pay down debt, invest in the business and pay dividends to shareholders. On the other hand, a negative cash flow indicates that the company is spending more cash than it is generating, which means that the company may be at risk of long-term financial problems.
4. Compare with the competition: Finally, you should compare the company's cash flow with that of its competitors in the same sector. This will give you an idea of whether the company is doing a good job in managing its finances and how it compares to similar companies.

In general, the cash flow is a useful tool for assessing the financial health of a company and can be used to make important decisions such as business investment, expansion and dividend payments.

TO HELP YOU UNDERSTAND THIS, WE WILL GIVE YOU A VERY SIMPLE EXAMPLE, WHICH HAPPENS EVERY DAY IN REAL COMPANIES:

• Accounting department: here the only thing that interests the person responsible is to record a sale or a purchase in the accounts on the date it occurs (i.e. according to its accrual).
• Finance department: the person in charge cares very little about the day on which his colleague registers the sale in the accounts. He is only interested in knowing when he is going to receive the money from the sale in the bank, or when he has to pay the money for the purchase. This is what is known as the cash flow of a company, i.e. in a very simple way:

Cash Flow = Money In - Money Out

Without any doubt, the financial part is the coolest and most exciting part of a company and you should have a minimum knowledge about it, since the growth strategies you define will be closely linked to the cash flow you generate, that is, to the need or not to apply for external financing.

DEFINITION OF CASH FLOW

Cash flow, also known as cash flow, cash flow or cash flow, is what measures the economic health of a company, and determines its capacity to generate profits and meet all its payments. In short, it indicates the financial state of a company.

Knowing and controlling cash flow will allow us to answer questions such as:

• Are we generating enough cash to meet our suppliers, and our creditors?
• How will an investment impact on expected cash flow?

• DIFFERENCE BETWEEN SALE AND COLLECTION: (VIEW+ TIP)

• DIFFERENCE BETWEEN EXPENDITURE AND PAYMENT (VER+ TIP) 

MAIN OBJECTIVE OF THE COMPANIES:

If we have correctly understood the sections described above, we will be able to draw 3 very useful conclusions to understand and improve our company's cash flow:

• What we are interested in is when the money comes in and when it goes out. Not when the invoice is posted.
• We have to try to keep the PMC as low as possible, i.e. to get paid as soon as possible.
• We have to try to keep the MTP as high as possible, i.e. to pay as late as possible.

Theoretically speaking, it sounds very simple, but now you have to put it into practice and it will be up to you to negotiate the MCPs and MTPs with your customers and suppliers. It will not be an easy task, especially if they are large companies with strong market power, but you will have to do your best to match them to your cash flow needs. If you want to optimise your cash flow, I recommend the TIP about cash management (+).

It is explained in a very simple way and with practical examples how the flow of treasury (+) o Cash Flow in a company. It allows the entrepreneur to acquire the minimum knowledge necessary to manage their daily receipts and payments. One of the main reasons why many entrepreneurs or companies startups (+), are forced to close their business, it is because of a break in the cash flow. So that this does not happen to you, you will have to be very clear that the word INCOME does not mean the same as the word COLLECTION and that the word EXPENDITURE does not mean the same as the word PAYMENT.

To help you understand this, we will give you a very simple example, which happens on a daily basis in real companies.

• Accounting Department: Here, the only thing of interest to the responsible person is to record a sale or purchase in the accounts on the date it occurs (i.e. on an accrual basis).
• Finance Department: The person in charge cares very little about the day on which his colleague registers the sale in the accounts. He is only interested in knowing when he is going to receive the money from the sale in the bank, or when he has to pay the money for the purchase. This is what is known as the cash flow of a company, i.e. in a very simple way:

Cash Flow = Money In - Money Out

Without any doubt, the financial part is the coolest and most exciting part of a company and you should have a minimum knowledge about it, since the growth strategies you define will be closely linked to the cash flow you generate, that is, to the need or not to apply for external financing.

Definition of Cash Flow

Cash flow, also known as cash flow, cash flow or cash flow, is what measures the economic health of a company, and determines its capacity to generate profits and meet all its payments. In short, it indicates the financial state of a company.

Knowing and controlling cash flow will allow us to answer questions such as:

• Are we generating enough cash to meet our suppliers, and our creditors?
• How will an investment impact on expected cash flow?

Difference between Income and Collection

A revenue is generated when the right to receive an amount of money from the sale of a product or service is generated. (according to the accrual principle). However, collection, occurs at the moment when this amount of money is received in our bank account or in cash. These two events do not necessarily have to occur on the same date, e.g: your company can make a sale today and not get paid for 30 days.

• For accounting purposes, the sale would be recorded today.
• The money will come through the bank on the 30th.
• This means that our PMC (Average Collection Period) is 30 days, i.e. the number of days from sale to collection.

Difference between Expenditure and Payment

A expenditure occurs when the obligation to deliver an amount of money for the purchase of a product or service is generated. (according to the accrual principle). However, payment occurs at the moment when we deliver that amount of money to our supplier, either in the bank account or in cash. These two events do not necessarily have to occur on the same date, e.g: your company can make a purchase today and not pay for it for 60 days.

• For accounting purposes, the purchase would be recorded today.
• The money will not leave the bank until the 60th day.
• This means that our PMP (Average Payment Period) is 60 days, i.e. the number of days that pass from the time we buy to the time we pay.

MAIN OBJECTIVE OF THE COMPANIES:

If we have correctly understood the sections described above, we will be able to draw 3 very useful conclusions to understand and improve our company's cash flow:

• What we are interested in is when the money comes in and when it goes out. Not when the invoice is posted.
• We have to try to keep the PMC as low as possible, i.e. to get paid as soon as possible.
• We have to try to keep the MTP as high as possible, i.e. to pay as late as possible.

Theoretically speaking, it sounds very simple, but now you have to put it into practice and it will be up to you to negotiate the MCPs and MTPs with your customers and suppliers. It will not be an easy task, especially if they are large companies with great market power, but you will have to do your best to adjust them to your cash flow needs. In this text Difference between revenue, collection and expenditure, payment The structure of the framework can be better appreciated and you will be able to see very simple practical examples for a better understanding and application to the business.