All About Cash Flow Diagrams
Cash flow diagrams are a source of knowing how much of the raw cash will be required in order to carry out a specific scheme over a given span of time. Cash flow diagrams are of great help for professional people such as engineers and accountants. The term raw cash means, the various transactions that are done during any project. This could include the cash inflows into the specific project or company, as well as the cash outflow from the company as well. Cash flow diagrams especially help in forecasting the business or the future of the project in which money is being invested. The entire cash flow is shown in a diagram drawn across a horizontal timeline. Cash flow diagrams are most vital to accountancy firms. Cash flow diagrams are becoming ever more so in the recent times and have now become a necessity in order to predict the problems and benefits involved with ongoing projects of these companies, on the basis of which the cash flow diagram has been drawn. Cash flow diagrams are also used to represent the payment of loans, mortgages, and different kinds of amortizations that the company is incurred with. One of the key functions of cash flow diagrams is to deal with the time value of money (TVM) problems that are closely related with financial management. What is Cash Flow? Cash flow is the total amount of cash that the investor or the owner has gained or lost during a specific period of time. The surplus of cash in the cash flow obviously means profit to the company. Cash flows are usually classified into 3 sub categories which are Operational, Investment and Financing cash flows that take place within a company or an organisation. Operational cash flow deals with the management of the key business objectives, such as payment to its creditors, accounts received from the trade debtors, increase in the stock and its replacement and others. While investment cash flow deals with the benefits incurred from the fixed asset of the company. Financing cash flow deals with the payment or repayment of loan, debentures and the payment of dividends, if the company is a public one. All these 3 categories of cash flows determine the overall profit or loss of the company for a specific period of time. How to construct a Cash Flow Diagram A typical cash flow diagram consists of a horizontal time line that has grids at specific intervals in order to show the change in cash flow in a given period of time. A cash flow diagram is usually measured in days but can also be done with years and months as well. The increase or decrease in cash flow is denoted with arrows in the diagram. Transactions that are positive, which include the cash received from the sale of an asset or from a trade debtor that causes the inflows in cash are denoted by arrows that are pointed upwards in the cash flow diagram. The negative transaction is denoted by arrows that are pointed downwards in the cash flow diagrams, which arises from the cash invested in assets, repayment of both short and long term loans and other such activities that occur during the period. |
