Cash Flow shows inflows (receipts) and outflows (payments) of cash during a particular period. It analyses the reasons for changes in balance of cash between two balance sheets. “Cash” refers to cash and cash equivalents that a company has. A cash flow only reflects the items which create changes in cash. Therefore, it is also called “statement of changes in financial positions –cash basis”. A cash flow statement can be for past or to project future.
- Cash flow is quite useful for short term financial planning, as it provides information regarding the sources and utilisation of cash during a period, it becomes easier for the management to assess whether it will have adequate cash to meet day to day expenses and make payment to creditors on time or have sufficient cash to pay the long-term loans and interest or have enough cash to pay for the purchase of fixed assets or not.
- Cash flow prepared for the future period is helpful in preparing a cash budget. It informs management about the surplus or deficit cash. It also helps in planning the investment of surplus cash in short-term investment and to plan short-term credit in advance for deficit periods.
- Cash flow is prepared at the end of the year, while cash budget is prepared at the commencement of the year. Therefore, a comparison between the two helps in ascertaining the extent to which the financial resources have been generated and used accordingly.
- Cash flow reveals how cash is being generated from debtors, stock and other current assets and which current liabilities are being paid. This enables the management to assess the true position of cash in future.
- Cash flow explains the reason why a company instead of having profit yet may have paucity of cash or when suffered a loss it may have plenty of cash.
- It helps in ascertaining cash from various activities separately (operating, investing and financing activity).
- It is also helpful in making dividend decisions, by ascertaining the position of cash generated from operating activities which can be used for payment of dividends.
- Cash flow statement is useful if one wants to analyse financial position of the company before investing.
- Cash flow doesn’t represent true picture of liquidity of a firm as liquidity does not only depend on cash.
- Cash flow only discloses the cause of change in cash position but not in working capital as by fund flow. Apart from this cash flow is more useful for short term financial planning.
- Through cash flow one cannot judge the true picture of enterprise as it ignores non cash transactions like: purchase of fixed assets by issuing shares or debentures etc.
- Cash flow is prepared on cash basis ignoring the accrual basis.
- Cash flow doesn’t disclose the net income of the business.
Types of Cash Flow
Cash Flows from Operating Activities
Operating activities are the main revenue generating activities of an enterprise. Cash generated by production and sales of business is reflected under this head. It denotes inflows of cash from operating activities and outflow of cash for business operating expenses. The basic information needed for operating activities can be obtained from comparative balance sheets, profit and loss account of current accounting period etc.
- Cash receipts when goods are sold and services are rendered
- Cash receipts are also generated on royalties, fees and other revenues like commissions.
- Cash payments are done to suppliers for their inputs
- Cash payments are also transferred to employees
There are two methods of ascertaining net cash flow from operating activities:
- Direct Method
In this gross receipts and gross payments of cash are included.
- Indirect Method
The profit and loss account is essential to be taken care of non-cash and transferable transaction where it is reversed. Listed companies are supposed to present their Cash flow statement under indirect method.
Cash Flow from Investing activity
Investing activities includes the purchase and sale of long-run assets such as land, buildings, plant and machinery etc not held for resale. Cash flow from investing activities takes into account expenses incurred for resources purchased for future income and cash flows.
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- Cash payments in purchase of fixed assets (including intangibles)
- Cash receipts acquired during sale of fixed assets (including intangible)
- Cash payments made in acquisition of financial instruments of other enterprise.
- Cash receipts from sale of shares, warrants or debt instruments of other enterprise.
- Cash advances and loans made to third parties. In case of financial enterprises these will be treated as cash flows from operating activities.
- Cash receipts from the repayments of advances and loans made to third parties. In case of financial enterprise will be treated as cash flow from operating activities.
- Cash receipts of insurance claim for property involved in accidents.
- Cash receipts of interest and dividends. In case of financial enterprise will be treated as cash flow from operating activities.
- Cash Flow from financing activity
Cash Flow from financing activity denotes cash generated from activities to finance the business operations. This activity results in change in capital and borrowings of the enterprise.
- Cash is transferred on issuing of shares and similar instruments.
- Other Instruments such as loans, bonds, short-term/ long term borrowings, debentures and notes
- Cash repayments are done for buy-back of equity share of amount borrowed, notes, bonds, and redemption of preference shares,
- Cash payment of interest and dividends.
A comparative analysis has been undertaken on basis of cash flow statements of HDFC Bank and YES Bank.
|Year||Operating activity||Investing activity||Financing activity|
|HDFC Bank||Yes Bank||HDFC Bank||Yes Bank||HDFC Bank||Yes Bank|
From the above analysis we can conclude that:
- As shown in the above table, average of HDFC bank is higher than Yes Bank in case of cash flow from operating activities, higher the average higher will be the rank. In case of investing activity average of HDFc stands at 2nd rank, making yes bank average greater than HDFC. While in case of financing activity again HDFC gained 1st rank its average being greater than yes bank.
- Standard deviation helps to know variation in activities for given period of time. Lower the standard deviation higher the rank. In operating activities and financing activity HDFC stands 2nd while in operating activity it holds 1st position.
On basis of above we can conclude that both the companies consist of good and satisfactory cash position.