Cash and Cash Flow

[dwilliams]

In small business cash is the lifeblood of the business and is even more important than profit. It takes cash to pay employees, buy materials, advertise and pay taxes. As a business owner, you rely on cash flow to get paid as well.

Cash flow is made up of inflows and outflows. Inflows include receipts from sales, disposal of assets such as equipment and interest earned. Outflows include payments to suppliers for inventory, payroll, purchasing equipment, rent and more. A positive cash flow means inflows of cash exceed outflows of cash.

Types of Cash Flows
Operational cash flows: Cash received or expended as a in normal course of business. This includes selling products or services, paying employees, buying raw materials and paying rent.
Investment cash flows: Cash received or expended by making capital expenditures. This includes buying equipment, buying a new facility, making investments or acquisitions.
Financing cash flows: Cash received or expended as a result of financial activities. This includes receiving or paying loans, issuing stock, and paying dividends.

How is cash flow different than profit?
Profit or net income is a good measure of how successful a business is doing but it doesn’t measure what is happening to the company’s cash. As a company grows it usually invests in inventory and extends payment terms to their customers. These consume cash but don’t improve profit. Depreciation on assets purchased in prior years is an expense and affects profit but does not use any cash.

Importance of a cash plan
When planning both short and long term funding it is more important to forecast cash requirements than profitability. A company that is generating a profit does not guarantee success or even survival. Remember that more businesses fail for lack of a cash flow than for want of a profit.

Calculating Cash Flow
Net cash flow is the difference between the inflows and outflows within a given period. Inflows include receipts from sales, increases in bank loans, issuing of stock, sell of assets, etc. Outflows include payroll, taxes, and payments to suppliers, repayment of loans, dividends, and capital purchases.

10 Ways to Improve Cash Flow

1. Use a budget to forecast your cash flow over the near future
2. Manage Account Receivables collecting past due invoices.
3. Reduce inventory keeping only necessary stock on hand.
4. Sell off or return obsolete/excess inventory
5. Lease equipment rather than purchase.
6. Take advantage of the full time to pay your suppliers (AP)
7. Make prompt payments only when there are worthwhile discounts.
8. Increase cash and credit card sales.
9. Get initial deposits on new projects
10. Bill as soon as work is completed.

Summary
Managing cash and cash flows is a critical priority in running your business. Profit is important, but maintaining a sufficient flow of cash is critical to business survival. Create a plan and stick to it. There are many ways to manage cash, but it takes someone always watching it.

[layla17]

I've always felt that maintaining good operations and financing cash flows are essential to running a successful business. They are a bit difficult to manage sometimes, but if managed well they can be a solid foundation for a business.

[Stephen]

Managing your cash flow is so crucial for a business to stay alive because otherwise you may have high sales but no cash in the box.