Cash - A Depreciating Asset without benefit of Depreciation
Updated: Dec 11, 2021
There are multiple types of appreciating and depreciating assets. Cash is one of the most liquid assets, people love to have it and feel very comfortable with high cash holding. Cash in physical form is most reliable, acceptable and easiest mode of the payment at zero cost of transfer. But many people do not know that it belongs to the depreciating asset class, on which income tax department does not allow benefit of depreciation.
Depreciation cost of cash is equivalent to inflation rate, that is why every rupee loses it’s buying power day by day. Other cost associated with cash is cost of financing the same, which can be considered equivalent to bank’s lending rates. In addition to this, another cost is opportunity cost, which is equivalent to the profit earned by converting cash into any operating asset. All this is not easily visible to most of us.
Cash flow management is one of the crucial part of any business, it is even more crucial than available cash. Cash flow not only increases the profit of the organization, if planned well, it also increases confidence and impetus to the organization. Mismanagement of cash flow might lead to loss of business or even shutdown of the same. Call2CFO services will help you in the availing the benefits of cash flow management by optimizing the levels of the cash maintained on time points. Each business has very different kind of cash level and cash flow requirements. We also know that while cash is very flexible asset which defends business from uncertainty, it also helps grabbing new opportunities.
However, cash is a double edged sword in business. For any business, cash flow measured on three parameters. These parameters forms part of financials of any business by the name of cash flow statement. Every entrepreneur must understand the cash flow statement as it is very crucial and gives clue on how things are going on in the business. Every cash flow statement has three essential parts: Operating Cash Flow: It is a measurement of core business operations on the company, which indicates how the main business of the company is doing. This is also key interest area of all investors, lenders and bankers for investing and lending to the business. Investing Cash Flow: It is a measurement of investing activities and also indicates how effectively additional cash is utilized. This has nothing to do with the core business operations, it is part of treasury operation.
Financing Cash Flow: Often companies take loan for availing the benefit of leverage or to buy assets or for working capital or other purposes. It is a measurement of all these financing activities and how and at what cost company's finances are managed.
As a business, all three parts of cash flow should be optimized. If one part of cash flow is not working, business tends to lose additional returns. It is like, you have some employee, which is paid when it works and not paid when does not work, but still sits in your office. It looks ok to everyone, but while he is sitting in the office, he is using the office space and other facilities like computers, light, AC, tea/coffee etc and also using the times of others, which has indirect cost to the company. Virtual CFO Services of Call2CFO makes all part of cash flow productive and working for the benefit of the organization.