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Types of cash flows: operating, investment, financial

You count the money at the end of the month and see that the expenses are more than the income, which means that it has gone into negative territory. I even had to take a loan at interest from a friend in order to pay salaries. At such a moment, the heart skips, and the question arises in my head: is everything really bad?

Maybe not. “Bad” minus or “good” can be found by dividing the cash flow by type of activity. What types to divide into and in what report – we will analyze it today.

Three types of cash flows
Entrepreneurs are accustomed to dividing the cash flow into receipts and disposals and to compare: if the amount of expenses is more than the amount of receipts, then the month is unsuccessful, and if, on the contrary, everything is fine. This is the fastest way to assess the state of affairs in business. However, it is not the most accurate, since a lot depends on what the money was for.

For example, in one month they overpaid for the maintenance of the office — they renewed the uniform of the employees, but at the end of the month there was not enough money for basic expenses – salaries and rent.

In another, they spent money on launching a new production line. The difference between income and costs was negative, but rent, salaries and other recurring obligations were closed.

If you evaluate each month by the total amount of expenses and income, they will turn out to be negative.

However, from the point of view of types of activity, the minus in the first month is “bad”, since the main items of expenditure are not provided with money on time, and the second month is “good”, because all the main liabilities are closed. And later, the new workshop will bring additional profit.

To understand how this works, let’s divide the cash flow by type of activity and consider each separately. There are three of them:

Operating.

Financial.

Investment.

A report will help to understand the topic, in which actual receipts and disposals by type of activity are recorded – a cash flow statement (CDS). This is how it looks:

Click to enlarge

Example of a consolidated cash flow statement

Operating cash flow
An operational activity is anything that a business does to achieve a primary goal. Each business has its own: for a restaurant it is the preparation of delicious food, for a furniture factory – the production of tables, chairs and cabinets, and for a legal agency – preparation of documents and representation in court.

To achieve the goal, each business hires personnel, purchases raw materials, produces goods or provides services, and is engaged in their promotion and sales. The costs of these processes are regular and require payment on a monthly basis. All of this helps to produce a product that customers purchase and money flows into the company. So, the expenses and receipts from the main activities of the company add up to the operating cash flow.

This is the key cash flow. It provides a stable financial position for the company. And when income from customers is enough for operating systems in existing retail outlets, then the remainder can be directed to business development.

Operating cash flow income includes payments from customers, including advances, as well as returns from suppliers related to the company’s core business.

But what items of disposal can be included in the operating cash flow:

Returns to customers

Purchase of goods, raw materials

Transport service

Acquiring

RSC

UTII or STS 6%

Staff salaries and payroll taxes

Search, recruitment and regular training of personnel

Travel expenses

Hospitality expenses

Advertising costs

Contractor costs

Office and retail outlets for rent

Office and retail outlets maintenance

Cash withdrawal fees

Depending on the business, something can be removed or added.

Operating cash flow can be:

positive – income from clients is enough to close all the obligations of the business;

or negative – the money received this month is not enough to pay the obligations.
If you do not plan the operating cash flow, then you can get into a cash gap.

For example, at the beginning of the month we figured out business expenses on a napkin and decided to increase the advertising budget. This month there was enough money for everything, but not next month. It turned out that the additional money spent on advertising was needed to pay for three new employees hired at the end of the month.

It can be seen that the payroll and payroll tax increased in February, and the advertising budget was increased in the same month.

As a result, calculating cash flow from operating activities helps an entrepreneur answer several questions:

Are your funds sufficient to ensure the smooth operation of existing points or do you need to find some additional amount? We estimate the difference between the planned expenses and income based on the operating cash flow.

How much revenue must be secured to avoid a cash gap? We estimate the amount of expenses for operating activities.

Is your own funds enough to buy expensive equipment, an office or invest in a new direction without threatening your operations?

On the preparation of an investment declaration by a SEZ participant
In accordance with Part 2 of Art. 13 of the Federal Law of 29.11.2014 No. 377-FZ "On the development of the Republic of Crimea and the federal city of Sevastopol…

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