Simply speaking, cash is basically money in the form of banknotes and coins. In the language of finance and bookkeeping, cash consists of current assets inclusive of currency or equivalents of currency, which can be used as an exchange medium legally. Cash is instantly negotiable and is restrictions free. Coins, checks, notes, postal orders, saving deposits as well as bank deposits make up cash.
What is cash flow for an enterprise?
A cash flow refers to all transactions which are recorded and involving a cash movement either to the organization (receipt) or from the organization (a payment). A healthy cash flow is the very backbone of an enterprise, the basis of a financially sound organization and the start and end of business cycle accounting. For an enterprise, certain transactions do not bring about immediate cash flow but is reserved for a subsequent stage, like stock that is purchased on credit.
Importance of cash flow measurement for an enterprise
Cash flow is actually measured keeping a specified time period in mind. Cash flow measurement may be used for these purposes:
Calculation of a particular projects value or rate of profit, also called return on investment (ROI).
Finding problems regarding liquidity of a business. A profitable company does not always entail being liquid. An organization may fail due to cash shortage even while making profits.
For finding out alternative measures for bringing in additional cash flow in case of an enterprise which is otherwise notionally profit making, but actually generating less operational cash.
For evaluation of the income quality that is generated through accrual accounting. When total or net income consists of great many non cash items, it is regarded as having low quality.
Evaluating the risks associated with a financial product. Some examples include matching cash needs, re investment needs, and also evaluation of default risk.
Cash flow management in an enterprise
Cash is a liquid asset and is easily misused. Every company should possess an efficient internal accounting system for controlling cash flow. In a large enterprise, responsibilities and functions of employees should be distinctly separated for ensuring that individuals, receiving, paying out or handling cash do not participate in recording function. This will prevent an individual from indulging in funds misappropriation or hiding facts through forging entries in books of accounting. Delegation of employee duties must be done in a manner so that a slip or a mistake taking place by one staff can be revealed by another one. Recording of cash receipts must be done in a manner so that real cash received may be verified against a separate, independent record a source document. Invoices, cash sales slip and receipts work as source documents.
A healthy cash flow is not only important for an organization to survive, but is of equal value for a private individual. Healthy cash flow in this case, comes from any residual income. This is important for maintaining the choicest lifestyle, fulfilling desires and aspirations as well as diminishing everyday worries.