CASH FLOW AND LIQUIDITY
Liquidity is the ability of a company to meet its current liabilities using its current assets. Cash flow refers to the cash that flows into and out of a company. How well a company performs in these two areas can impact its ability to operate and, ultimately, its profitability as well.
More money flowing into a business signifies an increase in business assets. Cash outflows from financing activities can signify improved liquidity. It may mean that a company has paid off long-term debt or made a dividend payment to shareholders.
The three activities that affect the cash flow of every business
- Operating Activities
- Investing Activities
- Financing Activities
Cash flows from operating activities is a section of a company’s cash flow statement that explains the sources and uses of cash from ongoing regular business activities in a given period. This typically includes net income from the income statement, adjustments to net income, and changes in working capital.
They include purchases of physical assets, investments in securities, or the sale of securities or assets. Investing activities are the acquisition or disposal of long-term assets. They can be included in the purchase of a company vehicle, the sale of a building, or the purchase of marketable resources.
The fact that these items involve the long-term use of cash, they are reported in the investing activities of the cash flow statement.
The financing activity in the cash flow statement focuses on how a firm raises capital and pays it back to investors through capital markets. These activities also include paying cash dividends, adding or changing loans, or issuing and selling more stock.
Some financing activities are
- Issuing bonds
- Sale of treasury stock
- Loan from a financial institution
- Repayment of existing loans
- Cash from new stock issued
Monitor these activities and see how they affect your profitability.