what is an inflow, outflow and net cash flow? and why is cash flow management important?

Question

i would like to know more about these. This is for a flower shop opening soon in june. thanks

Answer 1

These are elements to the "Cash Flow Statement" using the "Direct Method". The Cash Flow Statement has three sections: Cash Flow from Operating Activities, Cash Flows from/for Investment Activities and Cash Flows from/for Financing Activities.

The Direct Method is less commonly used than the Indirect Method. What is the Direct Method? It adds up the cash flows (as opposed to accruals, which the income statement and balance sheet are based upon) in and out of the business in each of the three areas of Operations, Investments and Financing. The upside to the Direct Method is that it is easy to understand (money in, money out = what's left over), but the downside is that it isn't much help except in tell you what you already know. That is, it tells you some money came in, money came out and you have money left over. The Direct Method is more common in Commonwealth countries (e.g Australia) for some reason, but I'm not sure why.

The Indirect Method is the much more common method, which starts with Net Profit (or another profit line item) and then adjusts the balance for non-cash items (e.g. depreciation), changes in balance sheet items (e.g. accounts receivables, accounts payable, inventory). The Indirect Method is less intuitive when looking at it by itself, but is much more helpful when used in conjuction with the income statement and balance sheet.

Why is this important?

First, remember that accounting rules are based on dual entry. You credit somewhere, you debit somewhere else. If your debits don't equal your credits, you messed up somewhere. Furthermore, income statement and balance sheet accounting is based on accrual basis, not cash basis. This is important because the cash flow statement acts as a RECONCILIATION of the income statement and balance sheet. In some pretty corny terms that I made up, your income has to come in to your retained earnings, your balance sheet has to balance - otherwise your cash flows won't flow. Yeah, dumb - but true.

Secondly, the Indirect Method shows where cash went and where it came from. The Direct Method lumps it all together and nets them at the three major sub-totals. The Indirect Method is much more informative. This is important so you, at the company's very basic needs, doesn't run out of cash. In more advanced terms, it ensures that you know where cash is coming from, where it is going, where the Company is getting stronger, where it needs help and most of all - that it's financial statements are robust and error free.

Answer 2

congratulations!

inflow is the amount of cash coming in, ie. cash or cash equivalent received from salews. Outflow is the cash going out; ie your cash payments for purchases. Net cash flow is the balance of inflow vs outflow. Cash flow management is important because it gives you early warning when you have or would have too much cash on hand so you could plan investing it, or conversely not having enough cash so you could secure additional funding at the critical time needed.

Answer 3

inflow and outflow I don't use these terms but I would assume its you incomings and outgoings

Cash flow is majorly important, you need to have an idea of your cash flow so you know you have you taxes at hand to pay when it is due and VAT......

I set my cash flow up on excel to begin with I put the year dates and estimated how much my vat was likely to be and any other expense out of the company and my incomings and as these events took place you fill in the actual figure and you can see how it affects your future cash postings.........

I.e whether in 3 months time you will have enough money to pay the rent etc