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Cash outflow is a term that is used to describe the portion of a company’s cash reserves that are paid out as part of the efforts to generate revenue. The money paid out may have to do with managing the expenses associated with the standard operating activities of the business, but may also include any cash that is used in various types of investment activities. Cash outflow can also include any type of financing activities that the business may choose to initiate, such as loans from a parent company to a subsidiary.
The basic nature of cash outflow is to allow the company to secure something that is likely to strengthen the financial stability of the business operation. In terms of the operation itself, this would mean any money paid to vendors and suppliers for goods and services purchased to aid in the actual operation. For example, raw materials used in the production process would be considered a cash outflow item, as would the funds used to pay for electricity and other utilities that are consumed during the production process. Both direct and indirect expenses may be settled using the cash reserves of the company and be considered part of the cash outflow.
Companies often use other strategies in addition to the production of goods and services in order to generate revenue. Each of those strategies are likely to require some amount of cash outflow as part of securing assets that will hopefully turn a profit in the future. In the way of investments, a company may use cash reserves to purchase shares of stock, bond issues, real estate, or other assets with the expectation of creating a revenue stream of some sort. The reserves used to secure those assets can rightly be referred to as cash outflow.
Financing activities outside the scope of the basic business operation is also common, and is often managed with cash outflow. A classic example is a parent company choosing to direct a portion of its cash reserves to a subsidiary that is either just starting out or is in the process of undergoing an expansion of some kind. The expectation is that the parent will benefit from this type of cash outlay in more than one way. Along with the benefits created by the subsidiary’s growth, the amount of the loan is often repaid with interest, effectively creating another revenue stream for the parent company for the duration of the loan.