Ever wondered what is cash flow? Understanding the basic concepts of cash flow will help you plan for the unforeseen eventualities that nearly every business faces. Although poor management is normally given as the main cause for business failure, poor cash management is running a close second as a common stumbling block.

Cash is ready money in the bank or in the business. It is not inventory, it is not accounts receivable (what you are owed), and it is not property. These can potentially be converted to cash, but can't be used to pay suppliers, rent, or employees. Profit growth does not necessarily mean more cash on hand. Profit is the amount of money you expect to make over a given period of time. Cash is what you must have on hand to keep your business running.

Cash flow refers to the movement of cash into and out of a business. Watching the cash inflows and outflows is one of the most pressing management tasks for any business. The outflow of cash includes those cheques you write each month to pay salaries, suppliers, and creditors. The inflow includes the cash you receive from customers, lenders, and investors.

There are two types of cash flow, positive and negative. Positive cash flow means, if its cash inflow exceeds the outflow, a company has a positive cash flow.

Conversely, negative cash flow means, if its cash outflow exceeds the inflow, a company has a negative cash flow. Reasons for negative cash flow include too much or obsolete inventory and poor collections on accounts receivable.

Cash flow can be broken down into three sections:

Operating cash flow: often referred to as working capital, is the cash flow generated from internal operations. It comes from sales of the product or service of your business, and because it is generated internally, it is under your control.

Investing cash flow: is generated internally from non-operating activities. This includes investments in plant and equipment or other fixed assets, nonrecurring gains or losses, or other sources and uses of cash outside of normal operations.

Financing cash flow: is the cash to and from external sources, such as lenders, investors and shareholders. A new loan, the repayment of a loan, the issuance of stock, and the payment of dividend are some of the activities that would be included in this section of the cash flow statement.

Good cash management is simple. It involves:

Knowing when, where, and how your cash needs will occur

Knowing the best sources for meeting additional cash needs

Being prepared to meet these needs when they occur, by keeping good relationships with bankers and other creditors

The starting point for good cash flow management is developing a cash flow projection to help them develop the necessary capital strategy to meet their business needs.

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