Definition of Cash Flow, Types, and How to Create Personal and Business Cash Flow

Cash Flow

What is cash flow?

In simple terms, cash flow is a term in the world of economics that means an effort to record every income and expenditure and then analyze whether it has decreased or increased.

Or, in a shorter sense, cash flow is a form of financial report.

Cash flow is not only important for companies or organizations, but it is also useful for recording personal finances.

Are you looking to find out what cash flow is and want to learn how to create cash flow?

If yes, the article below is for you.

What is Cash Flow?

Ash flow is another name for a cash flow report, which contains records of income and expenditure within a certain time period.

For companies, cash flow is included in one type of company financial report, which can provide detailed information regarding cash inflows and outflows, including every activity carried out by the company.

However, in its development, cash flow cannot only be applied to large companies or organizations.

Cash flow can also be an important report for individuals who want to build a healthy financial system so that every income and expense is recorded neatly.

Types of Income and Expenditures in Cash Flow

There are several types of income and expenditures that are commonly included in cash flow. The following are among them:

Types of Cash Flow Income

There are 3 types of income in cash flow: active income, investment income, and passive income. The following is a detailed explanation:

1. Active income

Active income in cash flow is the main source of income received regularly. Examples are monthly salary, THR, business profits, honorarium, or bonuses.

2. Investment income

Investment income in cash flow is income obtained from investment results, such as shares, mutual funds, deposits, or property sales.

3. Passive income

Lastly, there is passive income. Passive income in cash flow is income obtained from assets owned.

This type of income is similar to investment income, but usually passive income does not require energy to obtain.

Examples of this income are profits from house rentals or royalties from book works.

Types of Cash Flow Withdrawals

Meanwhile, there are four types of expenditure in cash flow: fixed expenditure, unavoidable expenditure, additional expenditure, and savings.

The following is a detailed explanation:

1. Fixed expenses (Must Be Paid)

The type of fixed expenditure in cash flow is any expenditure that, if not paid, will be subject to sanctions.

Examples include insurance, taxes, mortgage installments, debt installments, and so on.

2. Unavoidable expenses

The inevitable expenditure category includes all expenditures to meet basic needs.

For example, the allocation of food, credit, electricity, water, and so on.

3. Additional production

Additional expenditure in cash flow is a type of expenditure used for consumptive needs.

Starting from shopping for clothes, hanging out costs, and the like.

4. Savings

Savings is a type of cash flow in the form of expenses that are saved and then withdrawn at a certain time.

For example, deposits, savings at the bank, and so on.

How to Create Personal Cash Flow

There are several steps you can take to create personal cash flow, including the following:

1. Record the value of all assets owned

The first step in creating cash flow is to record the value of all assets owned.

Create a column containing a list of assets owned and their value.

Some of these assets are, for example, investment instruments and the amount of money invested, the amount of the balance at the ATM, the amount of shares, and even the property owned.

2. Make a list of liabilities

Next, make a list of liabilities or a list of debts you have, including credit card balances and total debt or installments at the bank or financial institution that you have.

3. Record all income and expenses

Record every day’s income and expenses. This cash flow can be put into the categories of assets, liabilities, and cash flows.

You can also add a special section to calculate the wealth value.

4. Determine the total value of wealth

Next, add up all the wealth values from each category, starting from total assets to total liabilities.

From there, you can get a brief idea of the number of assets you own.

5. Create cash flow

On a separate note sheet, try to record the entire monthly cash flow.

Write down all the inputs and outputs, then add up each one.

After that, you can reduce the amount of income by the amount of withdrawal.

From there, you can find out if your cash flow is positive or negative.

How to Create Business Cash Flow

There are several ways that can be done so that financial management in business can be neatly organized.

Here are some of them:

1. Record all company expenses and income

The first step to creating a cash flow business is to record all company expenses and income.

2. Calculate cash increases and decreases

Next, calculate whether there is an increase or decrease in cash by looking at the cash flow report and balance sheet in the cash book.

3. Calculate and report net cash for operating activities

The next step is to record the net cash used for operational activities.

You need to separate special cash and operational cash, then calculate the amount of net cash to include in the financial statements.

4. Calculate and report net cash for investment activities

Similar to the third step, in net cash, what is recorded are assets used for investment activities.

Investment activities can take the form of buying or selling assets.

5. Calculate and report net cash for funding activities

The next step in creating a cash flow business is to create a special report for cash on funding activities.

This funding is usually used to pay long-term mandatory financing, for example, debt.

6. Calculate the total net cash from the three cash flow activities

The final step is to create cash flow.

This is done by adding up all expenses and net cash income from operational, investment, and financing activities.

Then, compare the results with the difference in cash balances at the beginning of the period.

From the comparison results, you can find out whether the company’s cash flow shows positive or negative results.

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