Cash flow tracks rupees moving in and out, as against profit, which counts sales when invoiced and costs when incurred. A business can show a profit and still run out of cash, because its money is in customers' hands or on the godown shelf.
The three parts
A cash flow statement, as set out in the accounting standard AS 3, has three sections:
- Operating: cash from customers, minus cash paid to suppliers, staff and for expenses and tax.
- Investing: buying or selling machinery, property or investments.
- Financing: loans taken or repaid, capital brought in or withdrawn, interest.
A short cash forecast
For day-to-day use, a weekly forecast is more useful:
| Week | Expected in | Expected out | Closing |
|---|---|---|---|
| 1 | ₹6,40,000 | ₹5,10,000 | ₹2,80,000 |
| 2 | ₹3,20,000 | ₹7,90,000 | −₹1,90,000 |
Week 2 shows the GST payment, salaries and a supplier payment landing together. Seen a fortnight ahead, the owner can chase two large customers or draw on the bank limit.
What moves cash fastest
Collecting on time, keeping stock lean, and paying suppliers on the agreed day.