‘Cash Flow’ is an essential concept for the operation of any business. Think of it simply as being funds that move versus those that are fairly static. Specifically, Cash flow represents the difference between the cash that you have on-hand at the beginning of your fiscal period and what cash you have at the end of the fiscal period. Cash is generated from sales revenue and investments, for example, and cash is expended for operating expenses, such as labor and cost of goods.
A business may own physical assets that produce income (think of buildings and equipment, for example,) but those are fairly static and don’t represent liquid cash (cash that ‘flows’) to pay for today’s and tomorrow’s operating expenses. So, those assets are not part of cash flow. Similarly, assets including investments and accounts receivable are not immediately available to pay operating expenses, so they are not part of cash flow.
Cash Flow Budgeting
It is critical to develop a cash flow budget to continue healthy business operations. That budget will include figures in such categories as sales, costs of goods purchased to make or sell items/services, labor costs and other operating expenses.
A cash flow statement summarizes these activities and helps each business analyze and project cash.
Positive or Negative?
Cash flows can be either positive or negative. Positive cash flow indicates that you have more cash at the end of the fiscal period to sustain your business than at the beginning. That is healthy. Negative cash flow indicates that you have less cash at the end of the period than at the beginning of the period.
Lack of liquid cash is one of the biggest reasons that businesses fail…it’s called “running out of money.” So, wise business persons carefully project and manage cash.
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