Any business needs to make money to stay functional. This basic fact seems obvious to anybody that knows anything about how business works, but that doesn’t mean that it can be ignored. Because profits are the lifeblood of any business, knowing where money is coming from, how much the company relies on each income stream, and where money is going is of vital importance to any manager. Consequently, knowing the different methods by which money is moving is just as important, and an understanding of the differences between each is necessary. As such, the various kinds of monetary expenditures and revenues, or “flows,” can be broken down into three major categories.
Investment Cash Flow
Revenues and expenses related to a company’s assets are all forms of investments. For example, a business would need to expend money by investing in new equipment or real estate, but it could also make income off these same investments by reselling them later after they have served their usefulness, or even renting them out to other companies. All these potential expenses and revenues combine to make up the investment flow for the business, and how important this particular flow becomes depends on how reliant the company is on capital.
Operating Cash Flow
The combined operating expenses and revenues make up this flow of cash for a business. For example, paying employee wages and salaries would be an operating expense, while income from sales and production would be an operating revenue. Paying off or receiving loans would also count as a form of operating revenue or expense, respectively. Similarly, beginning new projects in the hopes of expanding the business, but not those that require new financing or investment in capital, all fall into this category. The flow of cash from operations will make up the bulk of the movement of liquid assets in most businesses, though there are always exceptions.
Financing Cash Flow
Unlike operating or investments, financing flows happen rarely for most companies and tend not to change very often. Financing activities such as issuing or buying back stock are not common events for most companies, though the paying of dividends on already existing stock does happen at regular intervals. The relative rarity of financing events means that they often are expected to have substantial inflows of liquid assets, with the expenses that they incur either planned for well in advance or happening regularly and predictably enough that they don’t take managers by surprise.
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