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Cash Management Increases Your Company's Chances of Success

Cash Management Flow ChartThe Elements of a Cash Flow StatementA cash flow statement comprises three basic parts:1. Operating cash flow: This is the difference between the money generated by your company's daily operations and the cash used to pay suppliers and to cover other business expenses.Operating cash flow can be a better measure of a company's profits than earnings. In some instances, a Statement of Income could show positive net earnings while the company could be unable to pay its debts.2. Investment cash flow: This shows changes to your company's cash position from buying or selling assets -- for example, selling and replacing company vehicles or acquiring plant and equipment. It also includes buying and selling stocks, bonds and other securities, as well as lending money and receiving loan payments.Other sources of income are also included. For example, if you operate a beauty salon and rent out an extra room as storage space, the income received is investment cash inflow.There will likely be times when your company shows little investment cash flow, but over time this helps assess how you have been using the cash your business generates.3. Financing cash flow: While operating and investment cash flow are generated from operations, financing cash flow is derived from outside sources such as investors, shareholders and lenders.Financing cash flow includes net borrowing from lines of credit, new borrowings, loan repayments, principal payments under capital lease obligations, dividends or cash distributions, proceeds from issuing stock and capital contributions from partners or owners. So, for example, issuing new stock is a financing cash inflow, while paying off a loan is an outflow.If you want your business to grow and remain competitive, a solid financial plan and a well-conceived strategy can mean the difference between boom and bust.
The obvious place to start is with a cash-flow analysis.
Review your company's cash flow statements to understand the cycle of inflows and outflows that stem from accounts receivables, inventory, accounts payable and credit terms. This helps identify any problem areas that need improvement.
A cash flow statement also highlights important distinctions, such as the differences between cash and sales or inventory. A ledger full of credit sales may look good on your Statement of Income, but that won't help if you can't pay your employees until you collect on those accounts.
Great Potential, but ...
By the same token, a warehouse full of inventory may represent great potential, but the electric company wants to be paid in cash, not with a gross of glow-in-the-dark shoe horns.
Once you have analyzed your company's cash flow statement, you need to create a cash flow projection.
This is an important cash management tool that lets you see when expenditures are likely to be too high or when you can expect a cash surplus and may want to arrange some short-term investments. The cash flow projection also provides a good idea of how much capital investment your business may need.
Cash flow statements and projections help your business in other ways, too:
  • If you are going to approach a lender for financing or potential investors for a cash infusion, they are going to want to see a cash flow statement based on generally accepted accounting principles (GAAP), as well as a cash flow projection based on industry averages, solid business assumptions and market trends.
The cash flow statement demonstrates how you manage your available cash. If you have borrowed from the lender before, the loan officer is going to want to see what you did with that earlier cash. If you managed the money well, your cash flow statement will provide the evidence.
  • If your business hits seasonal low-cash cycles every year, cash flow statements and projections will highlight those periods.
With that information you can shop around for low-interest, short-term financing to help keep your company running smoothly through those anticipated lean times. If your company hasn't projected those cash crunch cycles, your choices become limited. You may wind up letting your bills slide and damaging vendor relationships, or you may be scrambling to arrange emergency financing that is likely to carry a high interest rate.
Knowing when you are approaching the threshold of a traditionally high or low cash period also can help you determine the timing for launching a product or service or the need to trim or expand your company's staff.
Six Months Down the Road
In the meantime, your company's cash flow projection will show you, as well as potential lenders and investors, what to expect six months or a year from now. Cash flow projections are the key to making smart and profitable business decisions.
But, you may be thinking: My company has a Statement of Income. Why does it need a cash flow statement?
Certain expenses don't show up on your Statement of Income for some time. For example, you may have spent considerable sums of cash to beef up your inventory, but until that warehouse stock translates into sales and cost of goods sold, your Statement of Income won't reflect the purchases.
Similarly, while you may be celebrating the fact that you paid off a large business debt and thus improved your company's balance sheet, unless the interest you were paying on the debt was enormous, your monthly Statement of Income won't show much of a difference.
Other Expenses
Moreover, certain expenses don't affect cash, such as depreciation, amortization and depletion. These items need to be adjusted for on your company's cash flow statement.
Consult with your accountant who can help ensure you have the reliable cash flow documents your company requires to remain thriving and profitable.
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