Cash flow

Cash flow

is a concept that raises doubts when carrying out its effective calculation or optimization.

However, it is a key element that cannot be missing in the accounting field. In this post all doubts regarding its operation are resolved.

What is cash flow?

Cash flow, also known as cash flow or cash flow, is a magnitude used in the business environment to measure the ability of a company to create liquidity and, consequently, to make its payments.

How is cash flow calculated?

To carry out the calculation of cash flow, net profit, amortization and provisions must be added.

In other words, once a company knows its net result, it will have to add the endowments as accounting notes of its expenses, as well as the provisions for the period.

Depreciation and provisions

The aforementioned depreciation and provisions consist of a representation of the recess of the value of an asset in a business. Such representation is made from the accounting point of view. However, there are differences between the two concepts.

  • Depreciation shows a constant decrease due to time and asset utilization. An example would be the purchase of a company vehicle.
  • The provision,on the other hand, is produced by unforeseen events such as, for example, the insolvency of a client.

Types of cash flows

The three types of cash flows that exist are obtained through exploitation, investment and financing.

Let’s see the particularities of each situation:

  • In operating activities, cash flow comes from income from the business activity. It’s ordinary income. This group includes payments to suppliers, salary payments or collection to customers, among others.
  • Investment activitiesare linked to financial and real estate activities. In this way, it will cause the production of cash flows.
  • In financing activities, cash flow is generated by financing. Therefore, they can produce changes in the capital of the company or in the debts of the same.

These three formulas are valid for calculating cash flow.

In any case, the most relevant thing is that the calculations are undertaken in order to keep, at all times, under control the demanding liquidity in the company,as well as its treasury.

This is what allows the needs and expenses of the company to be covered.

How to optimize business cash flow


The existing principles for the correct management of cash flow are based on the same foundation: that more money is entered than is spent.

There are many strategies to effectively track and meet the treasury needs in the company.

We develop them below.

1. Advance charges

Because one of the most important principles of a good business is based on having liquidity, a great way to optimize cash flow is to collect as soon as possible.

For example, bringing forward the periods to customers in relation to the deferrals of their payments.

2. Defer payments

The cash and liquidity of a business should not be looked at only from the perspective of collections. It is equally necessary to collect early than to pay late.

What it is about is to have a free line of credit to avoid having to resort to financing from a bank and have liquidity.

It should be remembered that, for this, better conditions must be negotiated with suppliers.

3. Incentives for advance payments

While it is true that it is convenient to pay late, you should also take advantage of the offers of suppliers by prepayment,since you can obtain important annual profits.

4. Discounts on invoices

This is one of the most suitable mechanisms for the regulation of cash flow.

This is a type of financing offered by banks; a third party buys the invoices

from us and pays in advance, thus discounting an interest. Sometimes, they are cheaper than traditional credits.

5. Rent instead of buy

For a business to grow, capital investmentis essential. However, it should not be forgotten that this investment involves the immobilization of economic resources.

Therefore, when the equipment is leased, more liquidity and resourcesare obtained for the treasury. Some of the most effective formulas are leasing, lease-back or renting.

In short,
cash flow represents
one of the pillars in the survival of any company.

The formulas on cash flow optimization, glossed in the article, can help a business grow and consolidate,as well as make flow calculations more positive.