What is Cash Flow? How to correctly interpret "cash flow" for shareholders

Cash flow is an important concept in modern financial management, refers to the enterprise in a certain accounting period in accordance with the cash cash realization system, through certain economic activities (including operating activities, investment activities, financing activities and non-recurring projects) and cash inflows, cash outflows and their total amount of the total situation, that is, a certain period of the enterprise's cash and cash equivalents of the inflow and outflow of the amount of cash.

In the cash flow statement, cash flow is divided into three main categories: cash flow from operating activities, cash flow from investing activities and cash flow from financing activities.

Operating activities are activities that are directly involved in the production of products, the sale of goods, or the provision of labor, and they are the primary transactions and events that result in net income for a business.

From the definition of operating activities, it can be seen that the scope of operating activities is very wide, which includes all transactions and events other than investing activities and financing activities. For business enterprises, operating activities mainly include: selling goods, providing labor services, purchasing goods, receiving labor services, paying taxes and so on.

Generally speaking, the cash inflow from operating activities are: cash received from the sale of goods and services, tax refunds received, other cash received in connection with operating activities; cash outflow from operating activities are: cash paid to purchase goods and services, cash paid to and for employees, taxes and fees paid, other cash paid in connection with operating activities. operating activities.

There are certain differences in the identification of operating activities among various types of enterprises due to different industry characteristics. As financial and insurance enterprises are relatively special, this guideline gives tips on the identification of operating activities of financial and insurance enterprises.

Investing activities refer to the acquisition and construction of long-term assets and investments within the scope of excluding cash equivalents and their disposal activities.

Wherein, long-term assets refer to fixed assets, intangible assets, construction in progress, other assets and other assets held for a period of one year or one business cycle or more.

It should be noted that the investment activities mentioned here include both investment in physical assets and investment in financial assets, which are two different concepts from the "investment" mentioned in the "Accounting Standards for Business Enterprises - Investment". An "investment" is another asset that an enterprise acquires by transferring an asset to another entity in order to increase its wealth through distribution or to seek other benefits. The purchase of fixed assets is not an "investment", but it is an investment activity.

The reason for the exclusion of "investments included in cash equivalents" is that investments included in cash equivalents are already treated as cash.

Generally speaking, the cash inflow from investing activities are: cash received from the recovery of investments, cash received from investment income, net cash received from the disposal of fixed assets, intangible assets and other long-term assets, cash received from other cash related to investing activities; cash outflows from investing activities are: cash paid for the construction of fixed assets, intangible assets and other long-term assets, cash received from investment activities, cash paid for the construction of fixed assets, intangible assets and other long-term assets, cash paid for the investment of fixed assets, intangible assets and other long-term assets. assets, cash paid for investments, cash paid for other cash related to investing activities.

Financing activities, refers to the activities that lead to changes in the size and composition of the enterprise's capital and debt.

Capital here refers to both paid-in capital (equity) and capital premium (equity premium); debt here refers to external borrowing, including borrowing from banks, issuing bonds, and repaying debt. Accounts payable, notes payable and other commercial payables, etc. are operating activities, not financing activities.

Generally speaking, the cash inflow from financing activities are: cash received from investment, cash received from borrowing, cash received from other financing activities; cash outflow from financing activities are: cash paid for debt repayment, distribution of dividends, profits, or interest paid, cash paid for other financing activities.

The cash flow statement is categorized and reported according to operating activities, investing activities and financing activities, the purpose is to facilitate the users of the statement to understand the impact of various types of activities on the financial position of the enterprise, as well as to estimate the future cash flow.

Based on the above division, the cash flow of each major category of activities is further divided into two categories of cash inflows and cash outflows, namely, cash inflows from operating activities, cash outflows from operating activities, cash inflows from investing activities, cash outflows from investing activities, cash inflows from financing activities, and cash outflows from financing activities.

Analysis

Cash flow analysis serves the following purposes:

1. to make an evaluation of the ability to obtain cash;

2. to make an evaluation of solvency;

3. to make an evaluation of the quality of earnings;

4. to make an evaluation of the investing and financing activities.

Importance

Cash flow is divided into three categories according to the nature of its source: cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. Cash flow refers to the cash inflow, cash outflow and the difference between the cash inflow and cash outflow generated by certain economic activities (such as operating activities, investing activities, financing activities and non-operating projects) of an enterprise in a certain accounting period based on the cash basis.

In the development process of modern enterprises, what determines the rise and fall of an enterprise is cash flow, and what best reflects the nature of the enterprise is cash flow, and the evaluation based on cash flow is the most authoritative among many value evaluation indexes.

Cash flow is more indicative of the quality of an enterprise's profitability than traditional profit indicators. First, against the defect of manipulating profit by using non-operating activities such as increasing investment income, cash flow only calculates operating profit and excludes non-recurring earnings. Secondly, accounting profit is determined according to the accrual system, and can be adjusted by false sales, early recognition of sales, expanding the scope of credit sales or related transactions, while the cash flow is determined according to the cash basis, the above methods of adjusting profits can not obtain cash and therefore can not increase cash flow. It can be seen that cash flow indicators can make up for the defects of profit indicators in reflecting the real profitability of the company. The United States Enron (Enron) bankruptcy and Singapore-listed Asia's Cotai Paper (APP) into a garbage company is an important reason for the deterioration of cash flow, only those who can be quickly converted into cash earnings is the real profit. For companies with high earnings and low cash flow, it is particularly important to note that some companies' earnings may have been made in a one-off manner and realized only through adjustments to accounting entries, and no cash has been received, so such companies are likely to be at risk of a sharp downturn in future performance.

Factors affecting

Cash flow is the amount of cash inflow and outflow of a business in a given period. For example, the sale of goods, the provision of labor services, the sale of fixed assets, the recovery of investment, borrowed funds, etc., to form the enterprise's cash inflow; the purchase of goods, the acceptance of labor services, the purchase and construction of fixed assets, cash investment, repayment of debt, etc., to form the enterprise's cash outflow. Measuring whether the business situation is good, whether there is enough cash to repay debts, the liquidity of assets, etc., cash flow is a very important indicator. The day-to-day operations of a business are an important factor affecting cash flow, but not all operations affect cash flow. Factors that affect or do not affect cash flow mainly include:

(1) The change of increase or decrease between various items of cash will not affect the change of net cash flow. For example, withdrawing cash from the bank, depositing cash in the bank, and using cash to purchase bonds with a two-month maturity are all internal fund conversions between items of cash that do not increase or decrease cash flow.

(2) non-cash changes between the various items of increase or decrease, but also does not affect the net cash flow changes. For example, with fixed assets to settle debts, with raw materials for foreign investment, with inventory to settle debts, with fixed assets for foreign investment, etc., all belong to the non-cash items between the increase or decrease in changes, does not involve cash receipts and disbursements, will not make the cash flow increase or decrease.

(3) the cash items and non-cash items between the increase or decrease in changes will affect the net cash flow changes. For example, cash payments for purchased raw materials, cash for foreign investment, recovery of long-term bonds, etc., are involved in the cash items and non-cash items between the increase or decrease of changes in cash inflows or outflows of cash will be caused by these changes.

Financing Impact

The amount of funds raised by the enterprise according to the actual production and operation needs, through the cash flow statement, you can determine the total amount of enterprise financing. Generally speaking, the better the financial position of the enterprise, the more net cash flow, the less funds required, and vice versa, the worse the financial position, the less net cash flow, the more funds required.

Investment Impact

Cash flow is the main indicator of the enterprise to evaluate the feasibility of the project, investment project feasibility evaluation method has a dynamic method and static method, the dynamic method of the cost of capital as the discount rate, discounted cash flow, if the net cash flow is greater than 0 or the present value index is greater than 1, it is shown that the investment project is acceptable, and vice versa the investment project is not feasible. The payback period of the static method investment project that the original investment amount divided by the annual net cash flow, if it is less than the expected payback period, the investment program is feasible. Otherwise, the investment program is not feasible.

Creditworthiness Impact

Corporate cash flow is normal, sufficient, stable, can pay all debts due, the company's funds are in order, the less uncertainty, the enterprise risk is small, the higher the creditworthiness of the enterprise; on the contrary, the enterprise creditworthiness is poor, the risk of the bank's reputation is poor, it is difficult to get the bank support. Therefore, cash flow determines corporate creditworthiness.

Profitability impact

Cash is an extremely special asset, as follows:

One, the strongest liquidity, which can measure the short-term solvency and resilience of the enterprise;

Two, the cash itself has a low profitability, can only generate a small amount of interest income, but on the contrary, due to the excessively high stock of cash will result in the loss of opportunity cost of the enterprise's potential, therefore, a reasonable cash flow is not only to meet the needs of the enterprise, but also to meet the needs of the enterprise. Reasonable cash flow is not only to meet the demand, but also not too much accumulation of hoarding funds, which requires financial management personnel to make a trade-off between the liquidity and profitability of the funds, to seek the optimal balance of funds in different periods of time, and the ability to effectively organize the cash flow and flow rate in order to meet the occasional occurrence of the need for funds and investment opportunities.

Value Impact

In an efficient capital market, the value of an enterprise depends to a large extent on the investors' valuation of the enterprise's assets, such as stocks, etc., and cash flow is the decisive factor in the valuation method. In other words, the valuation depends on the cash flow of the enterprise in future years and its investors' expected return on investment. The more adequate the cash inflow, the lower the investment risk of the enterprise, the lower the rate of return required by investors, and the greater the value of the enterprise. The maximization of enterprise value is exactly the goal pursued by financial management personnel, and enterprise financial management behaviors are all carried out to achieve this goal.

Bankruptcy Impact

China's current bankruptcy law clearly stipulates that if an enterprise incurs serious losses due to mismanagement and is unable to settle its debts as they fall due, it can declare bankruptcy according to law, i.e., it reaches the bankruptcy threshold, which is two different concepts from the previous "insolvency", and through the analysis of cash flow, if an enterprise is not able to maximize its value by any means, such as property, credit or ability, the enterprise will be able to maximize the value of its assets and assets. Through cash flow analysis, if the enterprise cannot settle the debts due in any way, such as property, credit or ability, or cannot repay the debts for a long foreseeable period of time, instead of postponing the payment for the time being due to the difficulty of capital turnover, even if the company is still profitable, it is also a sign that the enterprise is on the verge of bankruptcy, and it is difficult to get rid of the destiny of bankruptcy. Therefore, financial management personnel should pay enough attention to cash flow, saving for a rainy day, through the phenomenon to see the essence of the information feedback to the company's management in a timely manner to pay attention to, when the company's financial adviser.