In simple terms, the term cash outflow describes any money leaving a business. Obvious examples of cash outflow as experienced by a wide range of businesses include employees’ salaries, the maintenance of business premises and dividends that have to be paid to shareholders. The opposite of cash outflow is cash inflow, which refers to the money coming into a business. If the cash outflow of a business is greater than the cash inflow, then the business can be said to be in a fairly bad state.
Different types of cash outflow
Although cash outflow covers all the money a business has to pay out, it can be divided into different types. The most common forms of cash outflow are:
Operating activities are activities related to net revenue that require cash to be carried out. This might include salaries paid to employees, payments to suppliers, and upkeep for plant and machinery costs.
Investing activities – cash outflow relating to investment activities covers those expenses related to non-current assets, as listed on the balance sheet. Examples include costs for the purchase of assets or loans to other parties.
Financing activities – this form of cash outflow is related to non-current liabilities (i.e. that will fall due after longer than 12 months) and includes matters pertaining to shareholders’ equity, such as paying dividends and buying back shares.
These are the definitions of cash outflow that need to be referred to when preparing a cash flow statement. This is a statement that covers both cash inflow and cash outflow over the course of a specific accounting period.
The advantages of calculating cash outflow
Knowing what the cash outflow of a business is – particularly over the longer term – makes it easier to understand whether that business is wasting cash or is using assets and income in a manner that drives profits. Only by knowing what cash outflow is required for a business to operate can the owners be sure that the company has sufficient capital in place to carry on operating.
Types of cash outflow
The different types of cash outflow that the owners of a business might have to include when making an overall calculation include the following:
Payments made to suppliers
Payments made to clear borrowing such as bank loans
Money used to purchase any fixed assets
Dividends paid out to any shareholders
Salaries and wages paid to employees
Any transport costs – such as vehicle leasing fees – related to business use
Any insurance dividends that have to be paid
Taxes that fall due during the accounting period in question
Any bank charges and interest payable by the business
The use of cash outflow calculations
If a company generates £150,000 in total income but has only £7,000 left in the bank at the end of an accounting period, then a calculation of cash outflow can be used to explain the difference between the two. In this case, for example, the business may discover that, while sales are going well enough to bring money in, the expenses being paid for materials have risen sharply, and this increase in cash outflow will need to be offset elsewhere.
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