Cash outflow definition
/What is Cash Outflow?
Cash outflow is the amount of cash that a business disburses. The reasons for these cash payments fall into one of the following classifications:
Operating activities. Examples are payments to employees and suppliers.
Investing activities. Examples are loans to other entities or expenditures made to acquire fixed assets.
Financing activities. Examples are payments to buy back shares or pay dividends.
Advantages of Calculating Cash Outflow
The main advantage of calculating the cash outflow of a business is in understanding where cash is being used. This can result in decisions to scale back or eliminate certain activities that do not enhance the competitive position of the business, while bolstering its cash reserves. Only by keeping tight control over these outflows will a business stand a reasonable chance of generating decent cash flows over the long term.
Related Courses
Presentation of Cash Outflow
The general categories of cash flow (operating, investing, and financing) are located within the statement of cash flows, which is one of the financial statements that a business produces. The amount of cash outflows revealed in the statement of cash flows are for the time period covered by the statement. This time period is likely to be for either one month, one quarter, or one year.
Analysis of Cash Outflow
The amount of cash outflow can be obscured by record keeping under the accrual basis of accounting, where accruals may be recorded that alter the amount of reported expenditures, even though no cash has been paid. Consequently, it is useful to examine the cash outflow on the statement of cash flows on a trend line, to see if a company is gaining or losing cash. A complete knowledge of cash outflow is needed to ensure that a business has sufficient cash (or can plan to acquire new debt or sell shares) to ensure that it remains in business.