Jargon Buster: Cash flow

The success or failure of an enterprise is predominantly attributed to cash management, often considered the elixir of life in the world of business. In this Jargon Buster column, we will look at the different types of cash flows, and what role they play in the industry. Cash management in a business is divided into three forms — operational, investment and financial.

Operational cash flow, as the name indicates, is the cash generated and expensed from day-to-day activities.

Interestingly, the recent demonetisation drive has brought many cash-based businesses to a near standstill, albeit for a temporary period. Let’s understand the importance of cash flow in a business by analysing the same for road operators. Recently, the Centre gave an explicit directive to all the road players to not collect toll for nearly three weeks. Although the Centre has made provisions to compensate and extend the contract period for these road players to make up for the loss in toll revenue, the private players felt the heat when it came to meeting their business commitments on operation and maintenance expenses due to cash shortages.

Financial cash flows Besides, the drop in toll revenue is expected to impact their financial cash flows too. Put simply, financial cash inflows are generated from loans taken and from interest incomes (from investments) while the expense could be in the form of debt repayments (both interest and principal repayments).

Taking the same toll road business as an example, with toll revenues hampered by the Centre’s directive, debt service obligations promised by the toll players are also expected to get affected. For example, India Ratings and Research (Ind-Ra) estimates that only 70 per cent of the toll roads in its rating portfolio managed to service their debt despite loss in toll revenue. For accounting purposes, operating and some financing cash flows get reflected in profit and loss statements as sales, operating expenses and interest expense.

Investment cash flows Financial cash flows are different from investment cash flows, which occurwhen the company makes new business investments or sells its existing assets. The investment gets reflected in the P&L statement as annual depreciation while the asset sale is captured as a separate line item in the statement. Note that the cash required for investment is generated from operating and financing cash inflows (debt or equity).

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