Business revolves around trade: the value exchange between two or more parties, notably with the generation of cash flow for product(s) and/or service(s). It is imperative to understand that no business can thrive and succeed without generating positive cash flow.
If a business reports earnings of $1 million, it doesn’t necessarily mean they have this amount in the bank.
Financial statements are based on accrual accounting.
Accrual accounting is a measurement of business performance and position by acknowledging economic events regardless of when cash transactions occur.
This is to reflect the financial health of a company and to determine how much revenue is being generated overall.
How can I achieve positive cash flow?
For a business to achieve a positive cash flow, they need to ensure long-term cash inflows outweigh the long-term cash outflows. This occurs through a transferring of funds to another party.
This could be:
- payment of wages to employees, suppliers or creditors,
- purchasing of assets and investments
- or payment of legal settlements.
The cash inflow however is a no-brainer, being the complete opposite to a cash outflow. It includes any transfer of funds into the possession of the company, usually from customers, lenders or investors purchasing equity within the business.
What is different about cash flow statements?
Cash flow statements differ from other financial statements as it acts like a corporate cheque book to reconcile balance and income statements. To break it down into simpler terms, the cash flow statements record company inflow and outflow cash transactions and can be done so as per the following:
- Operating activities cash flow
- Investing activities cash flow
- Financing activities cash flow
All companies must provide cash flow statements as part of their financial statements.
The industry in which it operates, as well as comparison of its industry competitors is an effective way to determine the health of a businesses cash flow situation.
If a business doesn’t generate at least the same amount of revenue as their competitors, it is likely they will go under when times get rough in the economy. This is not uncommon.
A company can go under if there are not enough funds available to pay bills. (Even if they are shown to be profitable!)
Analyzing cash flow with other financial statements can give a good indication on a business’s financial health.
Cash flow statements, along with the rest of the finance realm, are not straight forward. If finance is not your forte, it can be quite difficult to comprehend.
At The Small Business Lounge, we offer a number of services to cater for the needs of small business owners. We can assess your current financial situation and provide insight on current systems and processes, including your company cash flow snapshot.
Connect with us today for an individual quote tailored to suit your business needs.
Sourced from: https://www.investopedia.com/articles/01/110701.asp