If you look at the mechanism or workings of cash flow and interest, it seems that both are the same. In the cash flow there is money received by the company and outgoing money paid by the company. Likewise in interest, there are types of interest that are earned as profits and there are types of interest that are paid as expenses. But, of course there are many differences that separate between the two. And basically the two terms are also used to refer to different concepts.
In this discussion, we will review what cash flow is and what interest is, along with the things that differentiate between the two. So, let’s look at the discussion below.
Definition of Cash Flow and Interest
Cash flow is the inflow and outflow of money that occurs within a company or business. Cash flows can be cash or money received or paid by electronic transfer. Cash flow reflects the ability of a company or business to generate money and manage its finances effectively.
Cash flows are of two types, cash inflows and cash outflows. Incoming money is understood as company income from various sources, such as product sales, investment interest, income from loans, grants and others. Meanwhile, money out is understood as company expenses paid for various needs or paying obligations. Examples include operating costs, investment costs, paying principal and interest, taxes and so on.
While interest is the amount of money paid or received by a person or company in return for using the money. Interest can be paid on loans provided by a person or company to another person or company, or can be received on deposits kept at a bank or other financial institution.
Interest also consists of two types, interest received and interest paid. Interest received is interest earned from investments, lending, interest on savings and others. While the interest paid is the interest that must be incurred as a cost for debt, dividends, purchases on credit and so on.
Difference between Cash Flow and Interest
Cash Flow and Interest are two different things. Cash flow is understood as the flow of money into or out of the company from various sources, one of which is interest. Meanwhile, interest is a fee that must be paid or obtained from various sources, such as providing credit, investment and others.
In cash flow, interest is equivalent to income and expenses. The difference is, in some sectors the interest business does not originate from the company’s main business, so the nominal value is quite low. However, in certain sectors such as banking, interest is the main source of cash flow from these banking institutions and has a large nominal value.
The terms cash flow and interest are very familiar to a company. In fact, a sign of an operating company is the existence of this cash flow, and every modern company must earn interest from the income side, because modern companies cannot be separated from banks.
Cash flow or cash flow is the flow of funds in and out of a company. In this case there is something called positive cash flow, which is a condition where the amount of money coming into the company is greater than the amount of money coming out of the company. On the other hand, there is something called negative cash flow, namely the outflow of money from a company that is greater than the inflow of money or funds.
Make no mistake there is no link between cash flow and company profits. Companies that have positive cash flow are not necessarily profitable, conversely companies with negative cash flow are not necessarily experiencing losses in their operations. Cash flow only describes the flow of money in and out. This money can come in and out not only from selling and buying activities, but can occur due to debt, receivables, and investment activities made by the company.
Interest in the financial world is termed Interest, which is remuneration for loans or money deposits. The money that the company keeps in the bank is rewarded by the bank in the form of interest. Conversely, if the company borrows money from the bank, there is an interest expense that must be paid.
This interest does not always occur because of the relationship between the company and the bank, the company’s business relationship with its business partners can also generate interest income or interest expense. Likewise the company’s investment activities such as buying bonds in the capital market.
Cash flow is the incoming and outgoing money, positive cash flow means that there is additional money that the company can get, and negative cash flow means that there is money going out from the company. Conversely, interest can cause the company to earn income called interest income, or bear a burden called interest costs.
In the bookkeeping there is no such thing as a cash flow account, but in the company’s books there is an account called this interest. This is because cash flow only shows the condition of the company’s finances, does not show an asset, or company expenses/income.
There are positive and negative cashflow. Cash flow is positive if the money coming in is more than the money coming out, and it is negative if the money going out is greater than the money coming in. While interest must be positive. In the journal, if there is an additional interest, it is recorded in the credit position, and if there is a reduction, it is recorded in the debit position.
In the financial statements, interest expense is found in the income statement. This interest expense can reduce profits (company profits), but interest income can add to company profits. The cash flow is reported in a special report called the cash flow statement. It is in this report that the company’s receipts and expenses are recorded.
