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Understanding Cash Flow

March 10, 2017

 Welcome back to Finance Friday!

 

 

Snowing in March, ugh, only thing worse is when it snows in April.  At least we know the end of winter will soon be here! Instead of thinking about the snow, let's talk about finance!  Today we are going to speak about cash flow.  In February we look at different elements of business; revenue, accounts receivable, expense and accounts payable. Today we are going to look at the next step, cash flow. 

 

What is Cash Flow?

 

Cash flow looks at how cash is coming into and leaving the company.  There are multiple ways a company can bring in money.   In the accounting world, cash flow analysis takes place in The Cash Flow Statement. The Cash Flow Statement is a financial statement that shows how the cash is coming into and out of the company. There are three main categories on the statement, Operations, Financing, and Investing.

 

 

 

The categories on the Cash Flow Statement are used to categorize the different types of activities that generate cash. Cash from operations deals with cash coming from day to day business. This would be cash from selling products and services to your clients.  Financing activity deals with taking on debt to increase cash.  This could be cash from a bank in the form of a loan or from investors in the form of stocks or bonds.  Lastly, we have investing activity this would be cash from buying or selling stocks of another company or purchasing or selling equipment or land.

 

 For this blog, I do not want to get into the details of the actual cash flow statement.  As a small business owner, we do not necessarily need to worry about the formal statement. What we need to understand is how money is moving into and out of our company.

 

What to look at?

 

When we sell our products or services to our clients, we bring money into our business.  The cash will be received at the time of purchase, or there will be an increase in the accounts receivable account, and cash is received at a later date.  When we looked at the accounts receivable a few weeks back, we spoke about the importance of monitoring this.  You want to make sure you are receiving all the cash you are entitled to from your clients.

 

The cash you receive from your clients will fund your business and will help pay any obligations you have out there. These obligations are the expenses your business has to maintain operations.  Obligations could be your rent, insurance, salaries or any other cost of maintaining your operations.

For a lot of small businesses understanding the operational cash flow will be the most important aspect of cash flow. You should have a clear understanding of the cash coming into and out of your company, as well as; the cash you maintain in your bank account.

 

 

 

If your company is partaking in financing or investing activities, you will want to understand the spread of cash generation across each category.  Financing and Investing activities would be activities such as borrowing money from a bank or receiving cash from an investor in return for equity in the company. What percent of your cash is coming from operations, financing or investing activities?  

 

If the majority of your cash is coming from financing or investing activities, you may need to be concerned with the health of your business.  Of course, there is no clear-cut answer as to how much cash should be generated from each area. The proper spread for a company will depend on many factors such as your business life cycle, industry, and size. 

 

If you are having a hard time managing your cash flow and understanding, you should seek the help of a professional who can put your cash flow into perspective.

 

See you Next Week!

 

 

 *We hope you enjoyed our blog.  Please note that the intent of this blog is to provide general information and should not be construed as financial, financial tax, accounting, legal, consulting or any other type of advice regarding any specific facts and circumstances, nor should they be construed as advertisements for financial services. Always seek the help of a professional if you have questions/concerns about maintaining your financials.

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