Cash Flow Funding

Changes in Cash Flow Funding

The net cash flow in or out for a business for an accounting period must be matched by changes in cash flow funding. The term cash flow simply refers to cash moving in or out of the business.

Net Cash Flow

If we use the example cash flow statement below, the top half of the cash flow statement shows the cash flows in and out. It is normal to separate these cash flows into 3 major types operating, financing and investing activities. The final figure from this section of the cash flow statement represents the net cash flow of the business. In this example the net cash flow is negative indicating that net cash of 57,000 flowed out of the business during the period.

Funding

As we have seen above the net cash flow out of the business is 57,000. In order for this to happen, the business must match this cash flow out with additional cash flow funding.

The purpose of the bottom half of the cash flow statement (highlighted in blue) is to show how this additional cash flow funding has been found by showing the changes in the various sources of financing available.

In this example a net cash flow out of the business of 57,000 has been funded by an increase in the overdraft of 43,000, an increase in loans of 9,000, and finally the owner has injected a further 5,000 of capital.

As can be seen the two sides of the cash flow funding statement are equal. The net cash flow out of the business of 57,000 is matched and funded by additional sources of finance.

It is important to realize that a similar situation will arise if the net cash flow is a positive number, that is to say net cash flowed into the business. In this case the net cash flow into the business results in net negative changes in funding. For example, if the net cash received by the business was 5,000 then the result might be that the bank overdraft is reduced by a similar amount.