Business Planning
Business Financial Planning
Cash Management
Business analysts report that poor management is the main reason for business failure. Poor cash management is probably the most frequent stumbling block for entrepreneurs. Understanding the basic concepts of cash flow will help you plan for the unforeseen eventualities that nearly every business faces.
Cash vs. Cash Flow
Cash is ready money in the bank or in the business. It is the money available to pay bills, make purchases, and meet other immediate obligations.
Profit growth does not necessarily mean more cash on hand. A business can show a profit while still having cash tied up in inventory, accounts receivable, or other operating needs.
Cash flow refers to the movement of cash into and out of a business. It measures the timing and amount of cash receipts and cash payments, and it helps show whether a business can meet its obligations as they come due.
Positive Cash Flow
If its cash inflow exceeds the outflow, a company has a positive cash flow. A positive cash flow is a good sign of financial health, but is by no means the only one.
Negative Cash Flow
If its cash outflow exceeds the inflow, a company has a negative cash flow. Reasons for negative cash flow include too much or obsolete inventory and poor collections on accounts receivable (what your customers owe you). If the company can’t borrow additional cash at this point, it may be in serious trouble.
What Are the Components of Cash Flow?
The Cash Flow Statement summarizes the cash generated and used by a business during a period. It is commonly organized into three categories:
Operating Cash Flow: Operating cash flow is the cash generated or used by the normal day-to-day activities of a business. It includes cash received from customers and cash paid for inventory, payroll, taxes, rent, and other operating expenses.
Investing Cash Flow: Investing cash flow reflects cash used to acquire or cash received from selling long-term assets and investments, such as equipment, property, or securities.
Financing Cash Flow: Financing cash flow reflects cash received from or paid to lenders and owners. It can include borrowing, repaying debt, issuing stock, paying dividends, or owner contributions and withdrawals.
How Do I Practice Good Cash Flow Management?
Good cash flow management requires three basic practices:
- Knowing when, where, and how cash needs will occur.
- Knowing the best sources for meeting additional cash needs.
- Being prepared to meet cash needs through good relationships with bankers and creditors.
Short-term cash flow projections should be prepared weekly or monthly, while long-term projections should be prepared annually and for the next three to five years. Historical cash flow statements can help identify patterns and provide a useful foundation for future planning.