Money coming in – Money coming out

Understanding how money flows in a company is important to manage your finances. There’s basically money coming in, and money going out.

Money coming in
There are basically two ways in which money comes into a company:

  • The money the company receives from outside: equity and debts.
  • The money the company generates itself
    • by selling products or services (operating activities)
    • by eventual financial income (interest received and capital gains on shares)
    • by eventual exceptional income connected to non-core activities
source: glasbergen.net

Money going out
In the same logical thinking money leaves the company:

  • When paying dividends to shareholders and paying back debts
  • When paying the company’s costs
    • Operational costs
    • Financial costs
    • Exceptional costs
  • When doing investments

When calculating the cash-flow, be aware of the following posts

Paying back debts
The moment a company receives a loan it causes a positive cashflow. But, every time the company has to pay the interests for the loans, and repay the loan itself, it generates cash outs.

Investments
It’s obvious that when a company invests, and pays the bill, money is leaving the company. Whereas the accounting principles require that the price of the investment is spread in the P&L statement over the life cycle of the investment, the cash out takes entirely place at the moment of investment.

Non-cash costs
Non-cash costs are expenses which aren’t a cash out:

  • Depreciations are the spreading of the price of the investment over the life cycle of the good. The cashflow takes place at the moment of investment, the yearly depreciation cost is cash-neutral.
  • In the same way provisions for future costs do not entail any expenditure but are an accounting spread of the later cost.
  • Amortization means that the value of a good on the market diminished, which will lead to lower profits later on. But it’s not a cash out, it’s only a provision for later lower results.

Working capital
There’s a last term we want to introduce here as you need it to calculate the cashflow in the next topic: working capital. First, take a look at three accounting facts:

  • Sales do not always mean receiving money. A company can sell a lot and still go bankrupt if customers don’t pay. Non-paying customers are booked as receivables. If a company wants to know how much cash its sales really generated, then it needs to calculate:

Sales – Receivables = Paid sales
Purchasing does not always mean expenses. As long as the company hasn’t paid the supplier, these expenses are not yet cash out. This means that you need to make a correction to the purchases: subtract the sum of all unpaid invoices, which you find under accounts payable.

Purchases – Payables = Paid purchases
Has the inventory increased? Then your inventory is eating more cash which impact your cashflow in a negative way.

These three corrections on receivables, inventory and suppliers come together in the working capital.

Working capital = Inventory + Receivables – Payables
It indicates how much of the resources are absorbed by the companies activities. A lot of money is taken up by unpaid invoices and by inventory. These need to be financed.