Cash outflow is referred to as the process of movement of cash outside the business, which is due to the various liabilities that a business has during its course of operations.
The various ways in which cash would leave the business can be in the form of staff salaries, office rents, electricity bills or towards dividend payment to the shareholders. In principle, it functions in the exact opposite way of cash inflows, which is movement of cash into the business.
The balance of cash inflow and outflow determines the stability of a business. It is a general rule of thumb that any business which has a higher cash outflow as compared to its cash inflow is considered to be unhealthy or has a higher chance of getting bankrupt.
Types of Cash Outflows
Cash outflows can be classified into three categories, which are as follows:
1. Cash outflow from operating activities: Let us look at some of the examples of cash outflow that are part of the operating activities of a business.
a. Paying the suppliers in cash for providing goods and services.
b. Payment of interest to creditors in the form of cash.
c. Payment of government taxes in the form of cash.
2. Cash outflow from investing activities: The following are some of the examples of cash outflow from the investing activities of the business.
a. Purchasing of shares, debentures or bonds of other companies by cash.
b. Purchase of non current assets like property, plant and equipment for the business by cash.
3. Cash outflow from financing activities: The following are some examples of the cash outflow from the financing activities of the business.
a. Repaying in cash for the short term and long term loans taken for business growth.
b. Payment of cash dividends to stockholders.
This concludes our article on the topic of Cash Outflows, which is an important topic in Accountancy for Commerce students. For more such interesting articles, stay tuned to BYJU’S.
Important Topics in Accountancy:
Frequently Asked Questions on Cash Outflows
1. What are examples of cash outflow?
Some examples of cash outflow are:
a. Payments to suppliers
b. Payment of salaries
c. Loan interest payments
d. Purchase of fixed assets