Understanding Cash Flow

June 14, 2016 7:21 am Published by

Starting a business means a fairly large learning curve. While there may be many areas that you need to learn the “ins and outs,” understanding the concepts of cash flow is among the more complex and important in any business. Let’s examine the main concepts and terms associated with comprehending cash flow for your budding business.

What is Cash Flow?

Cash flow refers to generating or producing cash (cash inflows) and using or consuming cash (cash outflows). Managing cash flows is essential to the life of your company and is necessary to the successful operation of your business.

What is a Cash Flow Statement?

Josh Kauffman, author of “The Personal MBA,” explains it in simple terms:

“The Cash Flow Statement is straightforward: it’s an examination of a company’s bank account over a certain period of time. Think of it like a checking account ledger: deposits of cash flow in and withdrawals of cash flow out. Ideally, more money flows in than flows out, and the total never goes below zero.”  

Usually a cash flow statement keeps track of your company’s “bottom line.”

  • Positive cash flow indicates that a company’s liquid assets are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders, pay expenses and provide a buffer against future financial challenges.
  • Negative cash flow indicates that a company’s liquid assets are decreasing.

 

Cash flow is not just  made up of profit and loss. It also is affected by:

  • Accounts receivable
  • Inventory
  • Accounts payable
  • Capital expenditures
  • Borrowings and debt service
  • Other “timing” differences

 

Managing your Cash Flow

  • Keep a daily record of incoming and outgoing cash
  • Deposit any checks received on a daily basis
  • Use numbered cash receipts and account for all of them
  • Use numbered checks for disbursements
  • Send customer invoices within two days
  • Collect receivables within two months

 

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