What Is Outbound Cash Flow?
Outbound cash flow is any money a company or individual must pay out when conducting a transaction with another party. Outbound cash flows can include cash paid to suppliers, employee compensation, and taxes paid on income.
- Outbound cash flow is any money a company or individual must pay out when conducting a transaction with another party.
- Outbound cash flow is the opposite of inbound cash flow, which refers to all payments or money that is received.
- Both outbound and inbound cash flows are captured on a company’s cash flow statement.
- For an investor, a company with inbound cash flows consistently exceeding outbound cash flows may be deemed a desirable investment.
Understanding Outbound Cash Flow
An outbound cash flow occurs whenever an individual or company is required to pay money. As its name indicates, it is cash that flows out rather than in.
In normal circumstances, cash regularly trickles in and out of an individual's bank account or a company's general ledger. When money is spent, it is referred to as outbound; when money is received, it is referred to as inbound cash flow.
For example, when a company issues bonds—borrowing money that must be repaid over time with interest—it receives an initial inbound cash flow. The money investors lend to the company must then be repaid, though. Pretty soon the company will be obligated to service this debt by paying coupons on the bonds: an outbound cash flow.
Outbound cash flows, like inbound ones, can be characterized informally as money out and money in. They can also be captured on a cash flow statement (CFS) in accordance with standard accounting procedures.
Recording Outbound Cash Flow
The statement of cash flows—the cash flow statement (CFS)—summarizes the amount of cash and cash equivalents entering and leaving a company during a specific accounting period. It provides investors with insight into how a company's operations are running, where its money is coming from, and how its money is being spent. A company's cash flow statement is essential reading to determine its liquidity, flexibility, and overall financial performance.
Cash flow statements are segmented into three parts:
- Cash flow from operating activities (CFO): The amount of money a company brings in from its ongoing, regular business activities.
- Cash flows from investing activities (CFI): Any inflows or outflows of cash from long-term investments, including the purchase or sale of a fixed asset such as property, plant, or equipment.
- Cash flows from financing activities (CFF): A measure of the movement of cash between a company and its owners, investors, and creditors, showing the net flow of funds used to run the business, including debt, equity, and dividends.
Many accountants generally prefer to display CFO using the indirect method, whereby a company begins with net income on an accrual accounting basis, and then, subsequently, adds and subtracts non-cash items to reconcile actual cash flows from operations. In this case, typical outbound cash flows would typically consist of increases in inventory and accounts receivable (AR) and decreases in accounts payable (AP).
Elsewhere, in the CFI section, capital expenditures, acquisitions, and purchases of securities are major outbound items. In the financing portion of the statement, meanwhile, dividends, repurchases of common stock, and repayments of debt represent the bulk of outbound cash flow.
Using Outbound Cash Flows to Evaluate a Company
An analyst will compare outbound cash flows with inbound ones over a period of time as part of the evaluation of a company's financial condition. Inbound cash flows consistently exceeding outbound cash flows are desirable.
Investors will not be surprised to see a company record significant outbounds from time to time; they understand that smart investments are capable of generating consistently better inbound cash flow for years to come.
There will, however, be times when a significant outbound flow occurs, such as, for example, in the event of the construction of a new production plant or for a corporate acquisition. As long as these funds are applied wisely, the future inflows from such investments should earn acceptable returns for the company.