June 2, 2020

Cash Flow Terminology and the Business Owner

Small business owners often fail to understand the consequences associated with inadequate cash flow management until the harsh realities of business life start working. Typically one significant occasion is definitely when insufficient funds are available inside the business to meet the business liabilities.

It might be that business plans have been created, income statements prepared and cash flows projected. The business owner might have been actively involved in this work or may have delegated the task to a third party and treated the business planning process as a desk top exercise.

Pursuing the completion of the plans and reports, what follow up action was used?

Were those same plans submitted, not subsequently reviewed and no further actions taken to bring any actual results that were worse than forecast back to plan?

If this scenario is usually familiar a contributory factor may be a lack of understanding of what the terminology used actually means and may scare the business owner from taking action.

To assist enhance the knowledge of the small business owner some of the common terms associated with cash administration are explained below.

Cash Stability
The amount of money belonging to the business and available to legitimately expend, or the amount of money the company owes to a financial institution usually by way of a bank overdraft facility.

Cash Flow
Just cashflow is the difference between monies coming into the business and monies going out of the company, and measured across a period of time. The measurement may be a day, a month, yr or such period the business owner may determine.

Actual Cash Flow Statement
This is an analysis of all cash flow actions during the given period of time. It will summarize all monies received and funds expended. There are three elements to think about and report on.
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These are:

— the operating activities (cash stream from selling goods and cash flow from paying expenses)

– the particular changes in fixed assets (cash flow from sale or buy of assets)

– the adjustments in forms of finance (Cash circulation from borrowing or repaying financial loans and cashflow movements in efforts by and distributions to owners)

Cash Flow From Operations
This is the section of the cash flow that is directly attributable to the particular performance (profitable or otherwise) of the business. Excluded from these numbers will be cash movements related to items for example extraordinary events and sale or purchase of assets.

Cash flow through operations is the sum of the profit for the period in question plus the value of the non-cash items, such as devaluation, that have been charged against profits. For this figure is added or subtracted the movement in working capital during the period to give the Cash Flow through Operations.

Cash Flow from Non-Operational Routines
Included under this head is going to be included all cash movements arising within the business not directly associated with normal trading activities. This will include however, not limited to the sale or purchase of fixed assets, for example flower and machinery and furniture plus fittings; together with an increase in or even repayment of business loans.

Source plus Application of Funds
This term can be used to differentiate between the monies coming into a business and the monies going out. Funds coming into a business will be the source and can include sales cash received, arises from the sale of a fixed asset as well as the increase in loans borrowed.

The application of funds relates to cash that is expended from the business, and would include the transaction of goods or services, the buy of fixed assets or the repayment of business loans.

Forecast Cash Flow Statement
A similar convention to the Actual Cash Circulation Statement, however , this will project the anticipated cash flow movements for some long term period of time.

Cash Accounting
A method of sales that records in the books of account cash receipts as a selling on the day the cash is received and treats cash payments as costs on the day of payment.

Profit v. Cash
The profit of a company should not be confused with the cash placement of the business. A satisfactory cash flow place will almost certainly be dependent upon profits being generated.

However , remember that high non-operational cash outgoings may significantly reduce the operational cash generated resulting in a cash balance much lower than the reported income.

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