Operating Uses of Cash - dummies

By Kenneth Boyd, Lita Epstein, Mark P. Holtzman, Frimette Kass-Shraibman, Maire Loughran, Vijay S. Sampath, John A. Tracy, Tage C. Tracy, Jill Gilbert Welytok

Cash uses also show up in the operating section of a statement of cash flows. The cash outflows are kind of the flip side of the cash inflows. For example, accounts receivable from customers is an inflow, and accounts payable paid to vendors is an outflow.

Here are the operating cash outflows you’re likely to encounter:

  • Satisfying accounts payable: Accounts payable is the amount a company owes vendors for services and products purchased. When the original purchase takes place, no money changes hands between the customer and the supplier. Rather, the transaction contains a promise to pay within a certain amount of time.

    For example, suppose you order $500 of office supplies from Folders Office Supply, and Folders immediately invoices your company for $500. Your company doesn’t record this amount as a cash outlay, because Folders wasn’t paid yet; it merely has your promise to pay within 10 days (or 30 days, or whatever). This $500 becomes a cash outlay only after you sign and mail the payment check to Folders.

  • Trading portfolio purchases: Just as sales of trading securities are a cash source, the amount of money the company pays to buy any trading security is a use of cash. No securities other than trading securities go in the operating section of the statement of cash flows. Again, the key here for operating section placement is that the investment is short term.

  • Payments for other business expenses: This category includes any cash outlays to buy inventory, pay employees, remit income taxes due, or pay any other suppliers (such as utility providers or the telephone company).

  • Interest payments: Any cash paid to lenders in the form of interest also goes in the operating section. The purpose or source of the loan doesn’t make any difference. So interest paid to a related party, such as a shareholder, for an operating capital loan (cash made available for day-to-day business functions) is treated the same as interest paid to a vehicle financing company for the note on the company car.

When a company borrows funds to operate, the cash inflow from the loan represents cash flow from financing. However, interest payments on the loan are an operating activity. Keep this difference in mind.

The main thrust of the operating section of the statement of cash flows is to reconcile the cash versus accrual treatment of income statement items. Because paying dividends to shareholders isn’t a business expense, dividend payments don’t show up on the income statement, so they’re not an operating use of cash.