Modern financial management has many approaches to the definition of cash flow. Many scientists, for example, E. Krylov, B. Kolas, S. Richard, define the financial flow as the difference between the money that the company received and those that were paid during a certain reporting period. The article will examine in detail the classification of cash flows, their principles and characteristics.
Cash Flow Definition
Cash flow is a complex economic category. Scientists all over the world in different ways translate and interpret the English phrase cash flow. The very concept of cash flow first appeared in the United States of America in the middle of the twentieth century. Translated literally, the word cash means “cash desk”, “cash”. And the word flow in translation into Russian means "flow", "flow". It is thanks to the variety of transfers in various economic literature that such concepts as “cash flow” or “cash flow stream” are found. The nature and classification of cash flows does not change, depending on the method of transfer. Next, we dwell on the types of activities.
The concept and classification of cash flows of an enterprise depends on the type of its activity (operational or current, financial, investment).
What is operational activity?
Operating is called such activity, due to which the company receives the main income and cash flows.
For operating or current activities, making a profit may or may not be the main goal, depending on the subject to which this activity is directed.
Classification of cash flows from operating activities:
- The flow of funds arising from the sale of goods or the provision of services, the reduction of receivables and other income.
- The flow of funds associated with the payment of money to suppliers of raw materials for production, salaries to employees of the enterprise, payment of taxes and fees, payment of interest on bank loans and other payments that are related to the implementation of operational activities.
What is the investment activity of the company?
The company's investment activities are aimed at the acquisition and sale of long-term assets that are not related to cash equivalents.
Investment activities include:
- Capital investments related to the purchase and sale of fixed assets and other assets.
- Sale of securities.
- Financial investments on a long-term basis to other organizations.
What is financial activity?
Financial activities include:
- Short-term financial investments.
- Issue of securities.
- Attraction and repayment of loans.
Thanks to financial activities, the size and structure of equity and borrowed capital are changing. The exception is current payables.
Current cash flows
Classification of cash flows of an enterprise by current (operational) activity:
- The flow from the sale of goods, the provision of services to customers.
- The flow of rent, royalties, commission payments.
- Payments to suppliers for the supplied raw materials.
- Payments to employees.
- Payment of income tax.
- Payment of interest on loans and other obligations.
- Receipts of interest on receivables.
- Proceeds from financial investments that are acquired for further resale within 3 months.
Investment cash flows
Classification of cash flows based on investment activities:
- Payments to employees related to the acquisition, reconstruction and preparation for use of fixed assets.
- Payment of interest on liabilities that are included in the value of investment assets.
- Revenues from the sale of fixed assets.
- Granting loans and loans to other institutions.
- Proceeds from the sale of shares, and the costs associated with their acquisition.
- Proceeds from the sale of securities, and the costs associated with their acquisition.
- Dividends received and other income from equity participation.
Financial cash flows
Classification of types of cash flows based on the financial activities of the company:
- Deposits from owners, proceeds from the issue of shares.
- Payments to shareholders related to the repurchase of shares from them.
- Payment of dividends.
- Cash receipts from the issue of securities (promissory notes, bonds and others).
- Getting loans from other persons.
- Repayment of loans and borrowings that were received from other persons.
Signs of cash flow classification
Next, we consider in detail the characteristics of the classification of cash flows and how they are divided according to all characteristics.
1. On the scale of service of economic activities of the enterprise are:
- enterprise flow;
- structural unit flow;
- thread of a single operation.
2. By type of economic activity:
- total cash flow;
- stream of operating (current) activity;
- flow of investment activity;
- stream of financial activity.
3. Based on the direction of movement:
- incoming (inflow);
- outgoing (outflow).
4. Based on the form of implementation:
- in cash;
- cashless.
5. By circulation:
- external;
- interior.
6. By duration:
- long term;
- short.
7. By volume:
- in short supply;
- optimal;
- excess.
8. By type of currency:
- cash flow in national currency;
- cash flow in foreign currency.
9. Predictability:
- planned flow;
- unplanned flow.
10. The continuity of the formation:
- discrete;
- regular.
11. On the stability of the formation time intervals:
- cash flow at regular intervals;
- cash flow at irregular intervals.
12. According to the method of estimation in time:
- current cash flow;
- future cash flow.
So, now we have briefly considered the signs, composition, classification of cash flow. Now we dwell in more detail on each type of flow for each classification feature.
Depending on the scale of service
The cash flow of the enterprise is the largest and most general indicator on this basis. It reflects all the income and use of money in the enterprise as a whole.
The flow of a separate structural unit is already a more specific indicator that shows the cash flow in branches, representative offices and other divisions of an enterprise.
The definition of the cash flow of a particular business transaction is a kind of operational accounting of cash flow.
Depending on the direction of cash flows
The classification of the organization’s cash flows by type of activity was discussed in detail above, so we will focus on the direction of cash flow.
Incoming flow is the sum of all cash receipts that were recorded for a specific reporting period.
Outgoing flow is, on the contrary, the sum of all cash payments that were recorded for a specific reporting period.
Depending on the form of implementation
The classification of cash flows on this basis includes cash and non-cash flow.
The first is to transfer banknotes and coins from hand to hand.
Non-cash movement of money at the enterprise is recorded only in accounting records.
By circulation
The classification of cash flows on this basis includes external and internal flow.
External flow makes up receipts and payments to other legal entities and individuals. Due to this type of flow, the balance of funds at the enterprise can increase or decrease.
Internal flow is the movement of cash in-house within an enterprise; it makes up the internal turnover of money, therefore it does not affect the balance in any way.
Depending on the duration
Cash flow is considered to be short-term if the company invests for up to one year.
If deposits are made for a period of more than one year, then such a cash flow is considered long-term.
Depending on volume
The classification of cash flows by volume includes excess, deficit and optimal flows.
Excess occurs when the amount of revenue exceeds the sum of the needs of the enterprise. In this case, a positive balance is formed in the company.
A deficit flow is formed when an enterprise does not have enough funds to pay off its debts. The flow is also considered deficient when the balance at the enterprise is positive, but these funds are still not enough to satisfy all the needs of the company.
Optimal takes place when receipts form just such a balance, which is enough to fulfill all the obligations of the enterprise.
Depending on the type of currency
The flow is considered to be posted in the national currency if the monetary unit of the country in whose territory the enterprise operates is used for calculation. If the monetary unit of another country is used, then a cash flow in foreign currency is formed.
Predictability
The movement of money is considered planned if it is possible to predict when the funds will arrive at the enterprise, in what amount and approximately what they will be spent on. If an unplanned cash flow occurs, then such a flow is called unplanned.
By continuity of formation
Regular call cash flow, which occurs at the enterprise with some periodicity. If the movement of funds is associated with a single financial transaction, then the cash flow is considered discrete.
Depending on the stability of time intervals
The cash flow at regular intervals of formation is annuity in nature upon receipt or expenditure of funds.
The lease payment schedule with uneven time intervals agreed upon by the parties can be an example of cash flow with uneven formation intervals.
Depending on the time evaluation method
If the cash flow of an enterprise is measured at the present value at the current point in time, then such a flow is current. And if it is estimated at the present value for a specific future period, then this is the future cash flow.
Using the presented classification, it is possible to organize effective cash flow management at the enterprise, as well as analyze and plan.
Cash flow classification principles
Having studied the detailed classification of cash flows, we consider the basic principles of their classification, which are necessary for the effective management of cash flow and the activities of the enterprise as a whole.
The basic principles of cash flows:
- The principle of reliability of the information base. It lies in the fact that for the effective management and control of cash cash flow is necessary high-quality and reliable information about their movement.
- The principle of balance. Its essence lies in the fact that for the convenience of managing cash flows at the enterprise, they must be balanced according to various criteria: by types, time intervals, volumes and other characteristics.
- The principle of effectiveness.All funds received by the company should not hang on the balance for a long time, they should be used as efficiently as possible for timely payment of all debts and obligations of the company.
- The principle of liquidity. It is necessary to maintain the liquidity of cash, since non-compliance with this principle can lead to a shortage of cash in the enterprise.
Conclusion
This article examined in detail the classification of cash flow in an enterprise according to various criteria, as well as their basic principles, the observance of which will help ensure quality control and management of the movement of funds in the enterprise.
