Table of Contents

1 Definition of Cash Receipt Flow
2 3 Elements in the Cash Receipts Flow
2.1 Operational Activities
2.2 Activities of Investment
2.3 Activities of Funding
3 Ways to Arrange Cash Receipt Flow
4 Example of Cash Receipt Flow
4.1 What Data Will You Get from the Cash Receipts Flow?
4.2 Making Business Decisions Based on the Cash Receipt Flow
5 Why Net Cash Flow Can Be Negative?
6 How to Increase Cash Flow?
7 Reinvest Positive Cash Flow in Business Development

What is Cash Receipt Flow

In order to maintain financial stability, a goods and service company must have an accounting system or recording reports of all transaction activities. Based on the Financial Accounting Standards (SAK), in addition to the balance sheet and equity/capital change report, there is a cash receipts flow that must always be made per period.

The flow of cash receipts or what is commonly referred to as cash flow itself can be interpreted as a financial record that contains information about income and expenses for a period. This report will be very useful when you will evaluate the financial structure (liquidity and solvency), as well as the net assets of the company.

Not only that, you can also use it as an adaptive strategy to deal with changing circumstances and opportunities.

Uniquely, these financial records are only for all cash transactions. Curious? Come on, find out more about this financial report along with an example.

3 Elements in the Cash Receipt Flow

Below is a breakdown of each part of the cash receipts flow. While each company will have different items, the general setup is usually the same. This guide will give you a good overview of what to look for when analyzing a company.

Operating Activities

The cash receipts flow begins with Cash Flows from Operating Activities. It begins with the net profit or loss, followed by adding or subtracting that amount to adjust net income to the total cash flow figure.

What is added or subtracted is the change in the account balance of items found in current assets and current liabilities on the balance sheet, as well as non-cash accounts (for example, share-based compensation). Then you will find out the net income of the company.

Net income

This amount is the core of the income statement. Earnings or net income shows the profitability of the company over a certain period of time. It is calculated by taking total revenues and subtracting from them COGS and total expenses, which include SG&A (Sales, General and Administrative Expenses), Depreciation and Amortization, interest, etc.

Plus: Depreciation and Amortization (D&A)

The value of various assets decreases over time as they are used in business. Consequently, D&A is a cost that allocates the cost of an asset over its useful life.

Depreciation involves tangible assets such as buildings, machinery, and equipment, whereas amortization involves intangible assets such as patents, copyrights, goodwill, and software. D&A reduces net income on the income statement.

However, we add it back to the cash receipts flow to adjust net income because it is a non-cash expense. In other words, no cash transactions.

Less: Changes in working capital

Working capital represents the difference between the current assets and current liabilities of the company. Any changes in current assets (other than cash) and current liabilities affect the cash balance in operating activities.

For example, when a company purchases more inventory, current assets increase. This positive change in inventory is deducted from net income because it is seen as a cash outflow.

It’s the same case for accounts receivable. If it goes up, it means the company is selling its goods on credit. There are no cash transactions, so receivables are also deducted from net income.

On the other hand, if current liability items such as payables increase, this is considered a cash inflow because the company has more cash to keep in its business. This is then added to net income.

Cash from operations

When all the adjustments have been made, we arrive at the net cash provided by the company’s operating activities. This is not a substitute for net income, but rather a summary of how much cash is generated from the company’s core business.

Activities of Investment

This category of cash receipts flow is referred to as Cash Flows from Investing Activities and reports changes in capital expenditures or capital expenditures (CapEx) and long-term investments.

CapEx refers to the purchase of property, plant, or equipment assets. Long-term investments can include debt and equity instruments of other companies. Another important item found here is the acquisition of another business. The key thing to remember is that changes in long-term assets on the balance sheet are reported in the cash receipts flow of investing activities.

Investment in Property and Equipment

This Capital Expenditure investment can mean the purchase of new office equipment such as computers and printers for a growing number of employees, or the purchase of new land and buildings for the company’s business operations and logistics.

These items are needed to keep the company running. This investment is a cash outflow, and therefore will have a negative impact when we calculate the increase in net cash from all activities.

Cash from investment

This is the total amount of cash provided by (used for) investing activities. In our example, we have a net outflow for each year.

Activities of Funding

This category is also called Cash Flow from Financing Activities and reports any issuance or repurchase of a company’s stock and bonds, as well as any dividend payments made. Changes in long-term liabilities and shareholder equity on the balance sheet are reported in financing activities.

1. Issuance (repayment) of debt

Companies issue debt as a way to finance their operations. The more cash it has, the better, as it can expand rapidly.

Unlike equity, issuing debt does not confer any ownership rights in the company, so it does not reduce the holdings of existing shareholders. Issuance of debt is a cash inflow, as companies find investors willing to act as lenders. However, when these investors are paid back, then the payment of the debt is a cash outflow.

2. Issuance (payback) equity

This is another way to fund company operations. Unlike debt, equity holders have some ownership in the business in exchange for money that is given to the company for use.

Future income must be shared with these equity holders or investors. Equity issuance is an additional source of cash, so it is a cash inflow. In contrast, equity payments are cash outflows. It is a repurchase, through cash payment, of equity from its investors and thereby increasing ownership of the company itself.

3. Cash from financing

It is also called net cash provided by (used in) financing activities. Cash from financing is calculated by adding up all cash inflows and outflows associated with changes in long-term liabilities and shareholder equity accounts.

How to Prepare Cash Receipt Flow

These financial records can be made based on two sources of data, namely; current and previous period balance sheets, as well as profit/loss statements for this period. The presentation can also be made in two ways, namely the direct method (direct) and the indirect method (indirect).

The difference between the two lies only in the presentation of data originating from operating activities. In the direct presentation, operational activities are grouped into various categories, including being broken down into two types of cash flows; inflow or outflow.

Meanwhile, in indirect presentation, cash flows from operating activities are determined by correcting net income already in the income statement. So, the indirect method focuses more on the data already in the balance sheet and income statement.

In general, there are five steps to making this report, namely;

1. Calculate the increase or decrease in cash
2. Calculating net cash (net) in operating activities, either directly or indirectly.
3. Calculating net cash (net) in investing activities
4. Calculating net cash (net) in financing activities
5. Calculate the net cash amount from these three activities along with the opening cash balance.

Example Flow of cash receipts

What Data Will You Get from the Cash Receipts Flow?

1. Cash from operating activities can be compared with the company’s net income to determine the quality of earnings. If cash from operating activities is higher than net income, earnings are said to be “high quality”.

2. This report is useful for investors because assuming that cash is king, it allows investors to know the company’s overall cash inflows and outflows and gain a general understanding of its overall performance.

3. If a company finances losses from operations or finances investments by raising money (debt or equity), then the flow of cash receipts will immediately become clear.

Making Business Decisions Based on the Cash Receipt Flow

Now that you have a better knowledge of what your cash receipts flow is, it is time to interpret it. Here, we’ll cover four of the big questions you might be asking about the cash receipts flow in your business.

Why Can Net Cash Flow Be Negative?

Whether you call it “net cash flow” or “net cash flow increase/decrease for the period”, there are several reasons your company’s net cash flow may be negative.

Because net cash flow is an indicator of changes in cash over a period of time (and doesn’t include cash on hand), a decrease in net cash doesn’t necessarily mean you won’t have enough cash to pay your bills.

For example, your business could be performing very well, so you’ve decided to invest heavily in growth now. It will cause your cash flow to be negative at this point, but sometimes this is not a problem because you know your business is healthy and growing.

How to Increase Cash Flow?

While negative cash flow isn’t always a concern, it can become a problem if it persists over several periods as each period depletes the cash balance that is available for you to spend.

Negative or tight cash flow is often more about timing than anything else. One option for increasing your business’ cash flow is to reduce payment terms for customers, so less time elapses between when you earn and when you actually get paid.

In addition, a review of your operating and investment costs can also be useful in managing cash flow.

Reinvest Positive Cash Flow in Business Development

One way to grow your business is to take your earnings and use the money to further invest in your business. That could include hiring more employees, buying better equipment, or expanding your marketing efforts.

If you don’t reinvest profits to grow your business, growth can come at a slower rate. That can work well for your business model, but for some companies, such as high-growth startups, it will be a concern.

If you begin to notice a very large pattern of positive cash flow, ask yourself if there is anything you would like to do to reinvest the money and turn it into future growth.

Conclusion

The flow of cash receipts will not only be very useful to facilitate checking cash in the period, but can also be the basis for predicting the uncertainty of the financial health of your business in the future. Therefore, this report will be very useful for creditors, investors, management, or other related parties.

If you have difficulty managing and making cash receipts flow or other financial reports such as profit and loss statements, balance sheets, etc. in detail, you can use accounting software to facilitate a better bookkeeping process.