How Keeping Cash Flow Under Control Will Save Your Business
The term cash flow is sometimes a nebulous term, but in actuality, it is a phrase that relates to real world applications. From a more lofty perspective, cash flow is one of the pieces of information that corporations must submit yearly to investors — balance sheet statement, income statement and statement of cash flows. A more practical way of looking at cash flow is simply examining the amount of real and liquid cash a company has at its immediate disposal.
For example, take a wealthy individual who owns large amounts of business office real estate, but lives in his car and barely has enough money in his pocket to buy groceries. The man is wealthy, but he has very little cash flow. One way to look at cash flow is to draw an analogy with a water tank in a commercial process. The water flowing to the tank is the cash coming into a business, and the flow out of the tank is the cash leaving the business. The reserve in the tank is how much actual cash is on hand. Should there be a sudden demand for water in the process, it is required to have enough supply in the tank to respond, otherwise a "cash crunch" is the result. Therefore, cash flow is said to be an indication of a company's health.
The exact definition of cash flow can vary slightly depending on the type of business activity in which the company is involved, for instance, software, steel, cruise ship vacations, home tutoring services, etc. In a nutshell, cash flow is net income or operating activities plus investment income plus financing income.
- Operating activities – Any transactions that enter into the determination of net income, including selling, purchasing, producing goods, providing services, or paying suppliers, employees or lenders.
- Investing activities – Any transactions that are involved in the acquisition or disposition of non-current assets, including receipts from loans, acquiring and selling securities and acquiring and selling plant assets.
- Financing activities – Any transactions involving borrowing from creditors, and any transactions involving the owners of the company, including proceeds from the issuance of the company's bonds or stocks, outlays to pay the maturity of value of bonds, outlays to purchase the entity's stock and the payment of dividends.
In simple terms, all this nebulous terminology is reduced to a basic formula of just two components for a small business — sell, sell, sell and keep expenses to a minimum. Investopedia offers more information on cash flow with a video.
This article was written by Richard Carranza of Examiner.com for CBS Small Business Pulse.
