Business Cash Flow Management

1. Business Cash Flow Management

2. Cash flow is a summary of not only Profits and Losses, but the can also include the changes in the Balance Sheet (Assets and Liabilities) as well. Simply put, it is the explanation of the change in the amount of cash you have in the bank from the beginning to the end of a period. In a very simple example, let’s assume your business had a net income of $10,000 for the month. If you provide credit for your customers, you would have Accounts Receivable. Let us say your Accounts Receivable was $40,000 when you began the month, and when the month ended your Accounts Receivable was $35,000. This change of $5,000 was an increase to your cash flow. Let us also assume your Vendors provide you credit. In doing so, you would have Accounts Payable, which for this purpose at the beginning of the month was $30,000 and at the end of the month was $20,000. This $10,000 reduced your cash flow. So if we take into consideration the $10,000 income, added the additional $5,000 you received by lowering your Accounts Receivables then subtracted the $10,000 you used to lower your Accounts Payable, your cash flow for the month would be $5,000.

3. As you can see, Profit and loss statements can differ greatly from Cash flow. Cash flow management is one of the secrets successful businesses use to grow during the good times and survive during the tough times. It helps you to understand the importance of Accounts Receivable management, as well as the benefit Vendors can be in providing extended terms. Every business has a hidden cost component; this is what we will refer to as the cost of the Working Capital. Monitoring your cash flow will help you determine the adequate level of Working Capital you will need. To summarize, cash flow is a key indicator as to how sufficient your Working Capital needs are being met.