Understanding Cash Flow Basics For Small Businesses

There is no asset more important to a business than cash. When a small business has an adequate cash flow they can expand on their own without having to rely heavily on credit or outside investment. A consistently good cash flow gives small business owners and entrepreneurs the luxury of being in control of how they can best use their resources. It also lets them know when it is time to grow or make changes to their business structure in order to meet new demands or bring in new customers.

The better you understand the basics of cash flow, the better you will be able to manage it to keep your business running smoothly. Here are some simple definitions that will hopefully help you gain a clearer understanding of your business’s cash flow and how it effects your daily operations.

Cash Flow is the difference between inflows (actual incoming cash) and outflows (actual outgoing cash). Income is not counted until payment is received and expenses are not calculated until payment is made. Cash flow also includes infusions of working capital from investors or debt financing.
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Cash Flow Statement outlines the cash coming into a company (from sales, income from investments, asset sales) and going out (payments to suppliers, investment), the raising of capital (money borrowed or raised from shareholders) and the payment of returns of capital (interest and dividends) and tax.

Components of the Cash Flow Statement

The Cash Flow Statement is usually divided into three distinct sections:

Cash from Operating Activities is all net income plus all the non-cash items related to the operations of the company.

Cash from Investing Activities includes money spent on capital expenditures, such as new equipment, acquisition of property or other businesses.

Cash from Financing Activities refers to cash outflows such as paying off debt or dividends. Cash inflows from financing would include borrowing money or raising money by issuing stock.

Understanding the Difference between Cash Flow and Profit
Cash flow is the money that flows in and out of the firm from operations, financing activities, and investing activities. Profit which is also referred to as net income is what remains from sales revenue after all the firm’s expenses are subtracted. A company can be bringing in cash, but that doesn’t mean they are making a profit (and vice versa).

Cash Flow Analysis
Cash flow analysis is a method of reviewing and assessing the financing, investing, and operating activities of a company. The primary goal of cash flow analysis is to identify, in a timely manner, cash flow problems as well as cash flow opportunities. As much as every business owner should understand the fundamentals of cash flow, they also need to understand the importance of cash flow management. It is crucial that they work with their suppliers to negotiate reasonable payment schedules, that they have a solid system for sending invoices and collect payment, and that they are able to stick to budgets that are developed based on accurate cash flow statements.

When a business is able to improve their cash flow, they will in return improve their business’s chances of success.

The article is posted by Gerwyn Wallto. You can find other related articles here .