Cash Flow

Cash Flow

The amount of cash a company generates and uses during a period, calculated by adding non-cash charges (such as depreciation) to the net income after taxes. Cash flow can be used as an indication of a company's financial strength.
Notes:Cash flow is crucial to companies, having ample cash on hand will ensure that creditors, employees, and others can be paid on time.

The amount of net cash generated by an investment or a business during a specific period. One measure of cash flow is earnings before interest, taxes, depreciation, and amortization. Because cash is the fuel that drives a business, many analysts consider cash flow to be a company's most important financial statistic. Firms with big cash flows are frequently takeover targets because acquiring firms know that the cash can be used to help pay off the costs of the acquisitions.

Financial analysts generally consider cash flow to be the best measure of a company's financial health. Increased cash flow means more funds are available to pay dividends, service or reduce debt, and invest in new assets. On the other hand, reported net income is heavily influenced by a firm's accounting practices. Reduced income generally means lower taxes and more cash, thus the same accounting practices that reduce net income can actually increase cash flow. A firm with large amounts of new investments and corresponding high depreciation charges might report low or negative earnings at the same time it has large cash flows to service debt and to acquire additional assets.

Operating cash flow, calculated as cash flow (the sum of net income and noncash expenses such as depreciation, depletion, and amortization) plus interest expense plus income tax expense, is an important consideration in corporate acquisitions because it indicates the cash flow that is available to service a firm's debt.

Cash flow analysis is the study of the cycle of your business' cash inflows and outflows, with the purpose of maintaining an adequate cash flow for your business, and to provide the basis for cash flow management.
Cash flow analysis involves examining the components of your business that affect cash flow, such as accounts receivable, inventory, accounts payable, and credit terms. By performing a cash flow analysis on these separate components, you'll be able to more easily identify cash flow problems and find ways to improve your cash flow.
A quick and easy way to perform a cash flow analysis is to compare the total unpaid purchases to the total sales due at the end of each month. If the total unpaid purchases are greater than the total sales due, you'll need to spend more cash than you receive in the next month, indicating a potential cash flow problem.

When times get tough, money gets tight. And when money is more difficult and expensive to borrow, it's especially important for small businesses to take steps to ensure that their cash flows keep flowing. Here are five ways to protect your cash flow and help your small business ride out the storm.

Cash Flow management

1) Keep your weather eye open.
One of the key factors in weathering any storm is knowing that it's coming and what direction it's moving. Keep an eye on the leading indicators for your business and be aware of changing economic conditions. Prepare cash flow projections for the next year. This will help you to see what changes need to be made and when. If such-and-such happened and your predicted cash flow dropped x%, what could you do?

2) Review your credit policies and the credit histories of customers and/or clients.
Managing your customers' credit is an important part of cash flow management. Weed out unprofitable customers, those that cost more to maintain than they add to the bottom line. Flag those who have a history of slow payment. Remember that you do not have to extend credit to anyone. If a customer has a history of slow payment, changing the credit terms or even eliminating credit entirely may be necessary.

3) Take action to speed up payment.
First, invoice promptly. Putting off invoicing gives the customer the impression that you don't care how long it takes to get your money. Second, take measures to encourage prompt payment, such as clearly stating payment due dates and sending overdue notices. Use Invoices That Encourage Action gives more suggestions. Use collection services when necessary. Getting the money if you can is always better for your cash flow than a bad debt.

4) See if payments to suppliers can be extended.
On the other side of the coin, check on the credit terms that your small business's suppliers allow. Most suppliers allow thirty days to pay but you may be able to get them to extend that term to sixty or even ninety days, allowing you to keep the money in your cash flow pipeline longer.

5) Renegotiate contracts.
Landlords, lenders and contractors are not impervious to changing economic conditions so trying to renegotiate is worth a shot. For instance, if the lease on the premises of your bricks-and-mortar business is up, you may be able to negotiate a more favourable rate with your landlord - especially when other retail property is standing empty. A less expensive lease will let you free up more of your cash each month and get more of a cash flow going.
Remember, the outflow part of cash flow is never a problem; money will always run out of your business easily. Keeping the money coming in on a regular, sustained basis is the tricky part of cash flow management. Following the suggestions above will make it easier to keep your cash flow flowing.