Cash flow

Cash flow is an important concept in modern financial management. It refers to the movement of money into and out of a business plan, a financial project and a product within a certain period of time（a quarter or a full year）. Generally, through a series of economic activities such as internal business, investment and financing, a company works out its sum of cash flow. Here, cash is not what call in our daily life as ready money in hand. It’s mentioned as cash stock , cash reserved in banks, equivalents of cash, etc. If an investment is defined as a cash equivalent, it must fulfill simultaneously fours conditions: short limit time, quick circulation and easy transformation into expected money, small risk of value changing.

On the basis of origins and functions of cash flow, we count three kinds as seen below:

1)  Operationalcash flow. Operational activities refer to direct production, product and service sales . Money generated in these business make up the majority of companies’ net income. Besides , output cash flow in operational activities includes buying goods, paying labor, paying taxes, etc. Considering that business varies from the nature of industries, we have other definitions and evaluated areas, especially for finance and assurance industry.

2)   Investment refers to a long-term construction od assets, not including investment or activities within cash equivalents. Long-term assets indicates fixed assets, intangible assets and other properties that have at least one year’s or a business cycle’s time limit. Here, the investment activities contain both material investment and financial investment. Usually, cash received from investment activities are mostly : cash regained from investment, investment profits, etc. Cash spent on investment activities are：the purchase and construction of fixed assets, intangible assets and other expenditures on long-term assets.

3)   Financing activities refers to operations that result in changes of market research companies’ capital and debt’s dimension and composition. Generally speaking, cash is received from the issue of debt and equity, and cash is put out as dividends and share repurchases, etc.

 The following chart is cash flow statement of Bejing North company:

北方公司现金流量表分析案例

北方公司2009年现金流量统计如下表（单位：万元）：

year	2009	备注
Operational cash inflow	22690
Operational cash outflow	19816
Operational cash flow net inflow	2874
Investment cash inflow	16
Investment cash outflow	810
Investment cash net inflow	-794
Financing cash inflow	568	All is debt repayments without any dividends or shares.
Financing cash outflow	812
Financing cash net inflow	-244
Sum fo cash flow	23275
Sum of cash outflow	21437
Sum of cash inflow	1838

When we analyze the statement, it includes analysis of inflow structure and outflow structure, as well as the proportion between them.

a.Analysis of inflow structure

Among the total inflow, cash received from operational activities represent 97.48％, investiment activities0.08％, financing activities 2.44％. From here we see that operational activities contribute a lot to cash inflow, however the other two do a little.

b.Analysis of outflow structure

Among the whole outflow, cash spent on operational activities represent 92.43％, investment activities 3.78％, financing activities 3.79％. Thus it can be seen that the companies’ expenditure is concentrated on operational activities.

c.Analysis of proportion between inflow and outflow

According to the statement, operational inflow is 226900000,outflow 198160000, so the proportion between them is 1.15. It means that 1 RMB outflow returns 1.15 RMB. For investment activities, the inflow is 160000, outflow is 8100000. So the proportion is 0.02, which shows that the company is in a developing phase. In financing activities, the proportion of 0.70(568/812) means repayment is superior to debts. Relating the inflow with the outflow, we come to know that the company’s essential cash inflow and outflow are generated by operational activities. Besides, the operational net inflow is used to make up for expenditures of investment and financing. Apart from these analysis, we can also work out company’s cash profit rate with the help of the statement.

Through information implicated in the statement, Cash flow guides management’s financial decision-making. It provides suggestions on investment strategies. It serves also as a proof of company’s financial credibility. As cash is flowing all the time, so it manifest to some extent the force of repayment and reaction of a company. Cash flow is also applied to define a bankrupt point. For some time, it is a criterion to assess the value of a company.