Cash flow from operations is the actual cash generated from business operating activities such as cash received from customers visa vie cash paid on operational expenses. Cash flow from operations is accounted for when preparing the company’s cashflow statement which shows the actual movement of cash within the business as a result of operating, financial and investing activities. A guideline of cash flow from operations is given in this article.
How cash flow from operations is accounted for
Cash flow from operations is the consolidation that the direct cash received from customers and the cash paid to suppliers and other related operating expenses to get the net cash flow or outflow from operating activities. This is clearly shown when using the direct method of preparing the cash flow statement.
Cash receipts This is the actual cash received excluding outstanding money from customers and creditors as well as the cash generated from other business operations such as rent receivable, dividends receivable, interest received on loans and cash investments. Cash payments Cash payments refer to the actual cash paid to suppliers and other expenses such as interest and income tax paid. All non-cash entries like provision for doubtful debts, bad debts, depreciation, deferred tax, amortisation and any loss on the disposal of assets are added back to the income statement. On the other hand, any gains made through asset disposal are subtracted from the income statement.
Why accounting for cash flow from operations
To ascertain the actual cash inflow from operating activities The accounting of cash flow operations is important because it shows the actual cash generated from operating activities by subtracting cash payments from cash receipts. It shows the actual movement of cash in and out the account as a result of day-to-day operations. For planning and decision making The income statement which shows the actual movement of cash from operating activities helps in the planning and decision making process. If very little money has been received from creditors, this will help to decide on how to lure creditors to pay on time as well as how to tighten the company’s credit terms. Also, if much cash is paid out to suppliers, it is important to take some of the goods on credit and this can only be decided after the cash flow from operations is prepared.