Understanding Business Cash Flow

How does a business assess its cash flow potential and cash flow challenges

The term ' cash flow ' is widely used and somewhat widely misinterpreted . Its a specialized term in business and has often confusing definitions . The most pure from of ' cash flow ' is the cash flow statement for any firm . At its simplest its a ' cash in' and ' cash out' analysis . Key to this analysis though is the timing of the cash flows . Any good business cash flow statement or projection will show projected inflows and outflows over a period of time - usually annually . <br><br>We mentioned that cash flow is widely misinterpreted . That is because it is often confused with other accounting terms such as 'profits ', ' income ', and 'revenue'. Naturally real cash is the life blood of an business . We don't pay our bills with ' revenue'!.<br><br>So, yes , our firm makes things, we sell them, and eventually we receive payment . During that time we are paying out cash to employees, suppliers, and also waiting to get paid ourselves . We are only able to pay our bills as a business with real cash!<br><br>When businesses prepare a cash flow statement they list their monthly expenses, both fixed and estimated, and then focus on anticipating when customers will pay invoices, thereby generating cash . Naturally there has to be some solid work around any assumptions in that whole process - for example :<br><br>Are the projected sales going to be realized<br>Will the payments from those sales be made on time<br>How much can be drawn out of the business in the meantime<br><br>As most business owners who have borrowed already know this type of document is probably the most important one that the bank or finance company wants to see . <br><br>Business owners therefore need to properly understand the total ' cash flow cyccle ' That cylcle consists of purchasing inventory, booking receivables around the sales that are made, and then collecting hose receivables . Simply right ? Not really, the true challenge is in the following : ' TIMING'! <br><br>Many textbooks in finance have been written around the mis-timing of the cash flow cycle - where large and once great companies went bankrupt by misunderstanding the cash flow cycle . <br><br>Most lay people find it very difficult to comprehend that a company that is profitable can go bankrupt . As we have discovered that can absolutely happen as financial managers confuse profits from a sale from cash flow from a sale . If the cash pipe is ' blocked ' problems will occur!<br><br>In summary, any business owners or financial managers understanding of the business cycle and proper cash flow will add value to the success of the business from a financial perspective .

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