Cash In, Cash Out: making sense of the flow

Cash flow management is one of the most important finance functions in a company, especially for early-stage startups that rely on external funding to stay afloat.

By properly analysing, controlling and forecasting money in and out of a company, stakeholders are able to make decisions towards continuity, growth and exit of businesses.

Companies should regularly track and analyse cash movements—typically through cash flow statements. The periodicity can vary depending on the overall situation of the company and, sometimes, can be departmentalised based on the needs (ie, sales teams might need to know on a daily basis how much was sold, etc). At a minimum, all companies should conduct a monthly cash flow review and it is highly recommended to have a 13-week cash flow forecast model.

In summary, for internal management, this analysis offers a summarised view of all bank account movements. People are free to group collections and payments as desired as long as consistency is kept and to disclose with the level of details expected by decision makers. 

A common way to represent cash flow is following the IFRS standards from IAS 7 (Statement of Cash Flows), where this statement is split between operating, investing and financing activities. Cash flow statements can be represented using two methods: the direct method (preferred for early-stage startups) and the indirect method (typically used for companies publishing financial statements). 

Those activities group the movements that explain the difference between the balance of cash and cash equivalents in a period. Definitions as follows (accordingly to IAS 7):

“Cash comprises cash on hand and demand deposits.

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing activities.

Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity”

Operating activities typically begin with cash inflows and are adjusted by key payment categories (common pitfall is to consider that revenue equals cash inflow, which can not always be the case). The level of detail in investing and financing activities will vary depending on the company’s operations. As can be seen on the following example (based on the direct method from the IFRS):

Operating activities
	Cash collected from customers	100
	Cash paid to suppliers	(50)
	Salaries paid	(20)
	Other payments	(10)
Cash generated from operating activities	20
Investing activities
	Equipment purchased	(5)
Cash consumed by investing activities	(5)
Financing activities
	Equity issuance	200
Cash generated from financing activities	200
Cash flow for the period	215
Cash and cash equivalents - beginning	5
Cash and cash equivalents - end	220