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  • The Basics of Cash Flow

    Article by SBEC
    Published on August 15, 2016

    Cash is what keeps your business functioning. You obviously need profit, but equally as critical is your cash flow.

    In its simplest form, cash flow is the movement of money in and out of your business. If you’re opening your own shop, no doubt you plan to make a profit. But how will cash flow toward your till? In a steady stream, or in floods followed by trickles?

    Knowing how to do a cash flow analysis is an essential skill for every business owner; it can be the difference between being able to open a business and being able to stay in business.

    Cash flow analysis provides a means for you to conduct a periodic check on your company’s financial health. A projected cash flow statement estimates what the stream of money will be in coming months or years, based on a history of sales and expenses. A monthly cash flow statement reveals the current state of affairs.

    “As difficult as it is for a business owner to prepare projections, it’s one of the most important things one can do,” says accountant Steve Mayer. “Projections rank next to business plans and mission statements among things a business must do to plan for the future.”

    A cash flow budget is your core tool for maintaining control of company finances. For example, you can show profits in a company, but still be short on cash if a customer is late on payments. While you can usually cut costs, you can’t always generate income or sales. You need to know where the money is, where it’s going and how to get more when you need it.

    The basic elements of cash flow are:

    • Starting cash — This is your starting balance — what you have on hand at the beginning of each month.
    • Cash in — This is all cash received during the month, including sales, paid receivables, interest or cash from sales of assets or stock.
    • Cash out — Includes all fixed and variable expenses.
    • Ending cash — This is your ending balance. Add starting cash to cash in for total cash, and then subtract cash out.

    Your profit is not the same as your cash flow. It’s possible to show a healthy profit at the end of the year, and yet face a significant money squeeze at various points during the year.


    Inflows. Inflows are the movement of money into your cash flow. Inflows are most likely from the sale of your goods or services to your customers. If you extend credit to your customers and allow them to charge the sale of the goods or services to their account, then an inflow occurs as you collect on the customers’ accounts. The proceeds from a bank loan is also a cash inflow.

    Outflows. Outflows are the movement of money out of your business. Outflows are generally the result of paying expenses. If your business involves reselling goods, then your largest outflow is most likely to be for the purchase of retail inventory. A manufacturing business’s largest outflows will mostly likely be for the purchases of raw materials and other components needed for the manufacturing of the final product. Purchasing fixed assets, paying back loans, and paying accounts payable are also cash outflows.

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