Describe types of Cash Flows

There are three main types of cash flows that every business must understand:

1. Cash Flows from Operating Activities

These are the cash flows directly related to the day-to-day running of the business. Operating activities are the main source of revenue for most businesses.

Cash Inflows:

• Cash received from selling goods or services (cash sales)
• Money received from customers who owe the business (collection from debtors)
• Interest received on bank deposits

Cash Outflows:

• Cash paid to suppliers for inventory (credit purchases paid)
• Cash paid for operating expenses such as rent, wages, electricity, and transport
• Cash paid for other expenses like insurance and repairs

2. Cash Flows from Investing Activities

These relate to the purchase and sale of long-term assets that benefit the business for more than one year. Investing activities involve larger amounts of money and are not part of daily operations.

Cash Inflows:

• Cash received from selling fixed assets such as vehicles, machinery, or buildings
• Cash received from selling investments in other businesses
• Interest received from loans given to others

Cash Outflows:

• Cash paid to purchase fixed assets (new machinery, office equipment, or a delivery vehicle)
• Cash paid to purchase shares or other long-term investments

3. Cash Flows from Financing Activities

These involve how the business raises money to fund its operations and investments. Financing activities relate to borrowing money and changes in owner's equity.

Cash Inflows:

• Cash received from taking a loan from a bank or microfinance institution
• Cash introduced by the owner as additional capital

Cash Outflows:

• Cash repayments of loan principal to a bank
• Cash withdrawn by the owner
• Dividend payments to shareholders (if applicable)

Consider a small retail shop in Arusha called "Mwanajuma General Store." During the month of June 2023, the shop had the following cash transactions:

This example shows how a Tanzanian business engages in all three types of cash flows within a single month.

• Operating activities generate cash from the core business functions
• Investing activities involve long-term assets and affect the business's future capacity
• Financing activities relate to how the business is funded, whether through loans or owner's capital
• A healthy business should generate positive cash from operating activities

In Tanzania, understanding cash flows helps small business owners manage their daily operations. For example, a mama lishe (food vendor) at a local maduka (shop) in Mwanza needs to track whether her cash sales (operating inflow) are enough to cover the money she pays for ingredients and transport (operating outflows). If she takes a loan from a michezo (microfinance) to buy a new cooking stove, that loan money is a financing inflow, and she must plan for the financing outflow when repaying it.