“Cash flow is having the right amount of cash in the right places at the right time, every time.” – Adam Stewart
The net amount of cash movement in and out of the business in a particular or specific period of time is referred to as cash flow.
Profit
Overall revenue or profit or income after the deduction of the business expenses.
What comes in is referred to as cash inflow.
What goes out is referred to as cash outflow.
Important
Cash spent on business than it returns back is called a negative flow
Cash Flow Management: Keep track of the cash flow in the business
Cash Flows Operations (CFO):
Cash or amount required to carry out the business operation or the operation cost required to run the business. Long-term interest paid is CFO
Cash Flow Investing (CFI):
Cash or amount spent or invested in fixed assets like property and financial instruments in a long-term plan with the aim of creating a profit in the future.
Cash Flow Financing (CFF):
Cash or amount funded by owns, investors, and creditors, usually mentioned as debt, equity, and dividend transactions in the cash flow statement
Understanding cash flow in the business:
“Cash is king” common phrase among business owners, so it’s quite important for the owners to clearly understand the business’s cash flow.
- To make better decisions at any point, it is important to the accurate information about the cash flow in the business if not the decision may end up as a risk for the business.
- Understanding the about of money spent in the business and why is to exactly know where the money is spent, so time the money spent may not be in the profit and loss statement. This will help in the cost-cutting process.
- In order to maintain good relationships and the overall reputation of the business, it is very important to understand and make advance planning for the payment of invoices and bills to the suppliers so that the payment of all the cash at the same time can be avoided.
- Expanding the business is the most important as it shows the growth of the business, this expansion has to be made at the right time, In most cases, during the expansion process, the cash flow becomes an issue.
Sheet and Statements to be considered for effective cash flow:
- Balance Sheet: Brief snapshot of a company’s assets and liabilities.
- Income statement: Profitability by the business in a certain period of time.
- Transactions: Details of whether all the revenues booked in the income statement are collected or not.
- Liabilities: Sum of money owed by the business or company.
- Cash and Cash Equivalents: Company’s cash overall changes and assets that can be converted immediately into cash.
- Current Assets (CCE): Assets of the company that can be sold or used for the business operation over the next year.
How do analyze the cash flows?
Following are some of the metrics used by analysts and investors to understand the cash flow.
- Debt Service Coverage Ratio (DSCR): Measurement of a firm’s available cash flow to pay current debt obligations. Mainly important for negotiating loan contracts between companies and banks, helps analysts and investors to about the financial strength of the company.
- Free Cash Flow (FCF): Cash generated after the company’s cash flow for supporting the operation and maintaining capital assets. It is important for the company to pursue opportunities to increase the share value to enhance the shareholder values.
- Unlevered Free Cash Flow (UFCF): The amount business or the company has before going for the financial obligations.
Important: Interest expense differs with the time between interest accrued and interest paid.
Enhance Your Business
“Making more money will not solve your problem if cash flow management is your problem.” – Robort Kiyosaki.
- Managing the cash flow unexpected expenses.
- Identify any problem in the cash flow and eradicate the source problem.
- Cash flow management analysis helps maximize the earnings.
- Avoiding the extended cash shortages and rectifying them.
- Save potentially money by reducing the level of the debt.
- For large and multinational companies helps to forecast the cash liquidity and improve the cash quality.
Cash Management Tools:
- Checking accounts
- Savings accounts Money
- Market deposit Accounts
- Certificates of deposit
- Savings bonds
Big Three:
Accounts receivable, Account Payable, and Inventory.
Techniques for cash flow management:
- Regular cash flow monitor
- Accurate and proper billing
- Faster Payments
- Technology for accuracy
- Separate business account
- Business risk avoid
Basics steps for the cash flow analysis:
- All income sources have to be identified.
- Identify and calculate all the business expenses.
- Based on the operating, investing and financing activities create the cash flow statement.
- Finally, now the cash flow statement can be analyzed.