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Cash Flow Management

Cash Inflow Vs Cash Outflow: How are they Different?

Shubhangi Jain

| Updated: Aug 03, 2022 | Category: CFO Service

Cash Inflow Vs Cash Outflow

The stability of a business can be determined by the cash inflow and cash outflow within the organisation. After the Covid-induced pandemic, many businesses across the globe have faced Cash Crunch and losses. One of the reasons for such losses is the lack of clarity about the basic components of cash flow, i.e. inflow and outflow and the difference of Cash Inflow Vs Cash Outflow  

This article discusses the difference between cash inflow and outflow, which can help the business owner ascertain the cash position within the business.

How to differentiate between Cash Flow Vs Cash Outflow

The cash inflow and cash outflow can be differentiated on the following basis –

  1. Meaning
  2. Sources
  3. Impact on the Cash Flow of the Business
  4. Impact on the Growth of the Business

1. Meaning

The below mentioned information clarifies Cash Inflow Vs Cash Outflow on the basis of meaning

Cash inflow refers to the revenue generated or income received by the business. In simple terms, it is the cash that comes into the organisation due to its operating, financial or investing activities.

Cash Outflow refers to the amount that a business disburses or the expenditure incurred by a company during the financial year, which means that it is the amount which goes out of the business.

2. Sources

The sources of Cash Inflow Vs Cash Outflow are enlisted below

Sources of Cash Inflow 

Cash Inflow includes the following

  • Payments received from customers
  • Return on investment
  • Interest received on loans

Sources of Cash Outflow  

Cash outflow includes the following –

  • Money spent on Fixed Assets.
  • Money spent on providing salary to the employees of the organisation
  • Payment made to suppliers
  • Wages paid to daily workers
  • Transportation Cost
  • Insurance Dividends

3. Impact on the Cash Flow of the Business

The Cash Inflow Vs Cash Outflow can impact the cash flow[1] of the business in different ways such as-

Impact of Cash Inflow on the Cash Flow of the Business 

Inflow positively impacts the business’s cash flow management as it increases the amount of cash generated/coming into the business. It is imperative to maintain a positive cash flow of the business to ensure the smooth functioning of the operations of the business and to ensure that the business is afloat and pays off the debts and dividends to its investors.

Impact of Cash Outflow on the Cash Flow of the Business 

Outflow has a negative impact on the cash flow of the business as it would result in an increase in the cash spent / cash going out of the business. The cash outflow is more in start-ups as compared to established businesses.

However, cash outflow shouldn’t be considered an upheaval. For Instance, if there is a cash outflow due to the purchase of machinery, it can’t be considered a loss for the business, as it will reduce the costs and help to increase the effectiveness and efficiency of the business operations along with providing a return on investment of that machinery.

Impact on Growth of the Business

The Cash inflow Vs Cash outflow can also affect the growth of the business in different ways-

Cash Inflow

 A better cash inflow indicates the availability of cash in the business, which can help in acquiring assets and better investments that can help in the growth of the business.

Cash Outflow

Cash outflow can indicate a crunch in the business’s cash flow, implying that the business does not have enough cash for expansion and growth.

What are the Benefits of Maintaining a Balance between the Cash Inflow and Cash Outflow?

Maintaining a balance between the cash inflow and cash outflow can help better manage the business’s cash flow and differentiate between Cash Inflow Vs Cash Outflow, which can entail the following benefits.

Analysis of the Financial Position of the Organisation 

 The balance of Cash Inflow Vs Cash Ouflow can help in analysing the business’s financial position by determining the organisation’s liquidity and profitability. An organisation’s liquidity can be assessed by monitoring the business’s cash inflow and cash outflow. It helps to determine the ability of the business to pay off its debts by calculating the cash inflow and identifying the cash deficit by calculating the cash outflow.

Management of Cash  

A better understanding of Cash Inflow Vs Cash Outflow   can help the organisation better manage cash and ascertain the profit and loss incurred during the particular financial year.

Better Budgeting Decision

The annual or quarterly budget is an integral part of every business. The organisation’s budget is decided on the basis of the cash flow, i.e. cash inflow and cash outflow of that organisation. The balance between the cash inflow Vs cash outflow can help the organisation make better budgeting decisions.

Better Planning 

Thorough knowledge of the concept and the distinction between Cash Inflow Vs Cash Outflow can help the organisation in better planning related to the investment decisions, allocation of profits and other decisions regarding the operations of the business.

Performance Appraisal 

The performance of an organisation is assessed by calculating the ratio of the actual cash flow statement and the projected cash flow statement. A favourable relationship between the actual and projected cash flow statement can lead to performance appraisal. In contrast, with an unfavourable relationship between the two, the organisation needs to rectify the mistakes to improve its operational performance this is how the balance of Cash Inflow Vs Cash Outflow is beneficial here.

Conclusion

It can be concluded that cash inflow and cash outflow play a vital role in the stability of an organisation; hence, the organisation needs to acknowledge the concept of Cash Inflow vs Cash Outflow: How are they Different?

Read our Article: All you need to know about Cash Flow Statement

Shubhangi Jain

Shubhangi has completed her B. A.LLB (H) with specialization in Business Laws from Amity University. She is particularly interested in legal research and writing and wishes to utilize her knowledge to create informative legal content. She has prior experience in corporate and criminal litigation and has great drafting skills. She has also published various research papers in reputed journals.

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