Cash Flow Management

Cash Flow Management

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Cash Flow Management

The simplest way to define cash flow is the movement of money in or out of the business during a pre-specified time period.

Maintaining and updating cash flows is crucial for the business to understand its liquidity as well as take sound financial decisions.

IFRS Guidelines for preparation of Cash flow Statements

According to International Financial Reporting Standards (IFRS), the movement of all cash and cash equivalent statements should be included in a firm’s cash flow statements. This means that along with cash on hand , a business needs to include demand deposits, short term liquid investments that could be easily converted to cash, as well as overdrawn bank balances. Any movement in borrowings or net debts need not be shown in the cash flow statements.

IFRS states that the cash flow statement should be consistently prepared either using direct method (i.e. based on cash receipts and payments) or indirect method (i.e. wherein profit or loss is adjusted for the effect of non cash adjustments).

Benefit of Preparing Cash Flow Statement

While preparing a cash flow statement the major goal for a business is to enhance the use of funds. Cash flows help a business to speed up collections, avoid unnecessary and early disbursements and to minimise idle balances.
Another major advantage of preparing cash flow statement is minimising operational cost. Cash flows also aid in routinizing the cash flow process and minimizing the time and involvement of company’s management into routine, mundane process.

Financial Plans and Cash Flow

In order to take sound financial decision, net present value (NPV) should be considered. While in theory, estimating cash flows is based on formulas, but in practice, it could be quite a daunting task. In reality, the accounting decisions are based on ambiguity and uncertainties. Many accounting datas are the result of arbitrary assumptions,choices and assumptions. While preparing cash flow statement proper care should be taken that the estimates and forecasts that are taken in cash flow statements are correct.

Working Capital Management

One of the most important dealings of a firm in day to day business management is that of working capital. Working capital can be defined as all the short term assets used in daily operations. These assets consists primarily of cash, marketable securities, accounts receivable and inventories. The balance in this account can be highly volatile as any changes in the firm’s operational environment effects it directly.

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