What you need to know about mortgage loans
Published 09/11/2022
Knowing what mortgage loans are, is important to calculate, project, and manage this vital indicator is essential for every entrepreneur, partner, and manager because it is the most reliable indicator of a company's liquidity.
Therefore, if it is not taken into account, the business is simply unviable from a financial point of view: if it is not considered, it is not possible to know the reality of its economy and, therefore, decisions will not be aligned to its needs, capabilities, and availability of working capital.
Below, we will discuss this strategic, reliable, and essential indicator in-depth to show you what it is, how it can be calculated, why you should keep it in mind, and many other points of interest.
What is cash flow?
Cash flow results from all the net cash inflows and outflows of a company in a given period. This last part must be taken into account since time is vital in the cash flow analysis since it will vary over time and must always be taken into account when analyzing cash flow.
Cash flow provides valuable information about a company's ability to pay its debts and gives us significant indicators of its financial health. It is important to note that cash flow does not measure a company's profit or loss but rather the "resulting balance" of its activity, regardless of whether it generates profit or loss.
The cash flow is a balance sheet that reflects the variations in cash inflows and outflows over a certain period, generally monthly, quarterly, semi-annually, or annually.
In this way, the company is aware of the liquid assets accumulated during the period analyzed and, consequently, obtains a real relationship between income and expenses.
In other words, the calculation and analysis of the cash flow show the level of profitability or loss for the period in detail.
To arrive at this indicator and final balance, different variables of interest to the business are taken into account according to its characteristics and economic activity.
For example, in the case of income, some points of interest are sales profits and debt collection. As for expenses, we find salaries, purchase of merchandise, interest, and service expenses, among others.
Why is it important to have cash flow?
We've come to a key point! Now that you know what cash flow is, it's time to delve into this indicator's strategic and financial importance.
To illustrate its relevance, let's look at some of the advantages and benefits a company gains by making a cash flow for a period of interest:
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Knowledge of actual profitability
If you calculate this indicator, you will know the profitability of a given period of your economic activity and business operations.
Cash flow can also be applied to a specific project or investment to obtain qualitative information about profits.
For example, if you launch a new product, you can make a balance sheet of income and expenses for its first 3 months on the market. In this case, you would have to compare production and distribution costs, sales commissions, and other fees with the money earned from marketing it.
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Loss detection
Just as it shows profitability, it also alerts us about the losses derived from a period or project.
The cash flow will expressly point out how much money we lost and what the negative results were due to by breaking down all the expenses and the dynamics of variation of the cash flow statement in the other months analyzed.
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Identifying negative patterns and risks
From a financial perspective, a period of concern is not the only one that shows significant losses.
A warning signal is also evident in those periods in which there were movements, a tendency towards loss of profitability, or negative patterns that may compromise the future.
Precisely, calculating and evaluating cash flow will help you detect these potential risks in time, associated, for example, with high expense ratios or a monthly decline in sales.
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Better capital management
All the knowledge and certainties this indicator will give you are essential to optimizing your SME's cash flow management.
By determining the balance of income and expenses, you will have a clear idea of your working capital, accumulated financial commitments, and other realities that reflect how to manage capital properly.
This is very important for small and medium-sized companies, as they tend to have moderate levels of liquidity; therefore, small management mistakes can significantly impact and even lead to financial collapse.
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Optimizing decision making
Beyond capital and its management, knowing the cash flow provides the necessary tools and insights for optimal decision-making.
Among other things, it allows a more coherent and strategic analysis of credit and financing opportunities to determine how convenient they are for the business and whether it has sufficient financial capacity to pay interest, monthly installments, and other obligations.
It is also helpful when entrepreneurs plan new projects, growth opportunities, and other strategic moves.
What types of cash flow are there?
Cash flow can be categorized into three types:
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Operating cash flow (OCF): this type reflects all the inflows and outflows of money in the company as far as its operations are concerned, i.e., for its business activity. It includes sales revenues and expenses incurred by payments made to suppliers.
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Investment cash flow (ICF): This type corresponds to the investments made by the company in a given period. It reflects the income and expenses derived from investments, i.e., receipts from non-current assets and the costs derived from them.
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Financial cash flow (FCF): This reflects the income derived from the issuance of shares or debt and the expenses incurred to pay dividends to shareholders over time.
At El Paisa Multiservices, we want to help you with your finances in Hartford, CT. You can contact us if you have questions about our services.
By Ingenuity & Solutions
