Cash Flows
Cash Flow refers to the movement of money into or out of a business during a specific period of time. A common misconception regarding the idea that its not directly based on company profits, its instead on the cash for daily operations. When developing an understanding for Cash Flows, it's necessary to identify two types: Inflows and Outflows. An inflow is how money comes into a business, for example a business receives inflows through processes such as: cash sales, selling spare assets, government grants, and much more. However, Outflows is more directly focused on the money leaving the businesses, including expenses for labor costs, overhead costs, and taxes. A positive cash flow only exists when the business goes through the break even point and earns more than it spends. In some cases business, especially those that just began will be in negative cash flows where the business spends more than it earns requiring more management.
Another tip that most entrepreneurs must remember is that profit is important, yet businesses that are profitable on paper still can run out of cash. This serves as a reason why strong investors look at all aspects of a business including cash flow before investing and is a tip to you too. Now how can this situation occur:
Profit is an accounting concept, meaning it includes services regarding unpaid invoices and non cash expenses
Cash Flow is reliable through its in depth detailed report of every inflow and outflow
Another way to think about this is through an example: A small business may be able to sell $10,000 dollars of goods/services but payments are on hold for 60 days, causing issues within the business with covering wages, rent and other expenses. This particular example shows an issue of cash flow, not profit.
More Cash Flows!:
Successful businesses always divide up their expenses and cash flows to identify the businesses status. Here are 3 ways:
Operating Cash Flow: This is cash generated through daily business activities
Examples include: selling products, paying workers, buying resources or materials
he state of the cashflow shows whether the core business can support itself
Investing Cash Flow: This includes money from buying or selling assets
Examples include: equipment, property, stocks, or bonds
It reflects businesses investments looking out for their future
Financing Cash Flow: The use of borrowing money or issues shares, and paying the lenders back
Important Uses( Investors and Entrepreneurs)
Investors watch every detail about financial statements from companies to identify potential growth in the market. Data Analysts share this same technique with investors as both like to track cash flows from official Cash Flow Statements provided by companies. These statements state all inflows and outflows from operations and business activities. It takes record of investment purchases, sales, or even, loan repayments and capital received.
Entrepreneurs, especially new/small businesses, should utilize cash flow forecasts and divide their cash flows to predict future needs. Another process that's vital for start ups is monitoring burn rate, the speed of purchasing initial expenses, and in the beginning of a business it's perfectly okay to have negative cash flow, just keep it reasonable. Finally use of filing or even documentation of cost flow statements to avoid potential issues that may arise.
After Entrepreneurs,including small and big businesses, establish a strong, steady, and positive cash flow, typically it follows activities such as reinvesting in marketing, staffing, or developing the product. Another important need for businesses is to clear debts as quickly and safely as possible. Finally, appeal to the investors looking for companies with healthy cash flow, this will allow exponential growth in the company.
Conclusion
“Cash Flow is King”, a common phrase by big investors. Understanding Cash Flows allows for a new perspective to be applied when analyzing the market. With this concept mastered, you will be able to better understand not only cash flow sheets, but also balance sheets helping secure best investments in the market. Next time you go outside, and see a small street shop, or even a big business think of all the possible factors for outflow and inflow Cash Flows!
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