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Understanding Business Cash Flow

Guest post by: Stan Prokop

Article Overview: The article discusses the basic of business cash flow for business owners and financial managers .

Understanding Business Cash Flow

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 form 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 receipt of funds. Any good business cash flow statement or projection will show projected inflows and outflows over a period of time - usually annually.

We mentioned wide misinterpretation. 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'!.

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!

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:

Are the projected sales going to be realized

Will the payments from those sales be made on time

How much can be drawn out of the business in the meantime

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.

Business owners therefore need to properly understand the total ' cash flow cyccle ' That cycle 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'!

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 subject of our article.

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 receipt of cash from a sale. If the cash pipe is ' blocked ' problems will occur!

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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Article Tags: business cash flow, cash flow



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Improving Cash Flow - How do I improving Cash Flow? What the best way to improve it to another 100% growth YOY? Has anyone does this or achieved this using online marketing? Thanks, Roberts
Re: Improving Cash Flow - Thanks for your information. guide on how to avoid the problems of over trading. <-- Where is this guide? Any URL? guide on debt factoring and invoice discounting: the basics. <-- Where is this guide? Any URL? I just want to learn more about this. I am also looking for a good article on: What exactly is Cash Flow? Ways to improve cash flow at individual level and organizational level? I think it is a problem of thinking and mind sets problem. If we can change the way of spending, we can have more Cash. Robert
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Exclusive: Interview with Results - Hi Forum Members, I'm helping start up a Business Coaching and Consulting company here in Toronto, Ontario, Canada (a Subsidiary of RSC Business in Los Angeles). As a Research and Development Intern I am required to practice my listening and interview skills by surveying Small and Medium Businesses on thier Business. This Survey is designed by RSC Business to also assist the Business being interviewed more insight into their own business. I am looking to interview about 30 businesses across North America over the span of 3 months. At the end of these interviews I will be publishing a report of the results and they will be made available for free to the Interviewees. The Report data will include responses from a minimum of 100 interviews. I would like to extend this opportunity to members of the Forum. If you would like to have this short 20-30 minute interview conducted on your Business and you reside in North America please send me an email or PM. Please contact me at andy[at]jvprosperity[dot]com to arrange our interview and to get free access to the results when they are published.


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