If you review the liquidity reports of many organizations, you will see that some of them have significant cash outlays. Companies that make substantial investments in long-term initiatives may seek funding through financial markets, especially if money in corporate coffers is quickly depleting. Money-seeking firms also may reach out to external financiers, such as stockholders and lenders.
A cash outlay is money a company pays for its operating expenses. It's also called a cash disbursement or outflow. The business may spend money on various charges, which run the gamut from material costs to selling, general and administrative expenses. These include:
- rent
- office supplies
- litigation
- salaries
- insurance
- utilities
Accountants record cash outflows in a statement of cash flows, also referred to as a liquidity report or cash-flow statement. As corporate expenses, cash outlays are integral to a statement of income, also known as a statement of profit and loss.
To have a broader picture of a company's cash outlays and their importance in liquidity management, it may be helpful to see the other side of the liquidity coin -- that is, get an understanding of the firm's cash inflows. Also known as a cash receipt or remittance, a cash inflow refers to money a company is receiving from business partners, such as customers as well as vendors and service providers -- in case of rebates, refunds or discounts, for example. Cash remittances also may concern loan proceeds and receipts from stock issuance.
Corporate accountants report cash outlays and inflows in a liquidity report. This statement has three specific sections that accountants report as follows: cash flows from operating activities, cash flows from investing activities and cash flows from financing activities. To prepare a cash-flow statement, accountants start with a company's beginning cash balance, add all inflows to it, subtract all outflows from it and then calculate the firm's ending cash balance sheet. Investing cash flows relate to sales and purchases of such long-term assets as equipment and real property. Financing cash flows concern money coming from debts as well as stockholders' investments and dividend payments.
A corporate bookkeeper must follow specific rules when recording cash outlays. These edicts include U.S. Securities and Exchange Commission guidelines, Financial Accounting Standards Board rules and international financial reporting standards. To record cash outflows, the bookkeeper debits the corresponding expense account and credits the cash account. In this case, there's a reduction of company money. Cash payments affect two accounting reports -- cash is a balance sheet item, whereas an expense is an income statement component.
