Tag: Flow

The 5 main causes of cash flow problems, cash flow business.#Cash #flow #business


The 5 main causes of cash flow problems

Cash flow business

Anywhere in the world, whether you are in Australia, UK, US, Canada, or elsewhere, the causes of cash flow problems are the same!

CASH IS KING

  • The ability to generate positive cash flow year in year out is essential for a business to be viable in the long term.
  • Surplus cash flow lubricates growth of a business.
  • It is impossible to successfully grow a business unless it is both profitable AND generates surplus cash flow on a sustainable basis.
  • Without strong, positive cash flow a business will never thrive and grow.
  • Inadequate cash flow is a symptom of management problems in a business, NOT the cause.

Evidence of Cash Flow Problems

  • Late payment or non payment of supplier invoices, direct debits being dishonoured, late payment of taxes and employee superannuation, even worse being late payment of wages to staff.
  • More extreme evidence of cash flow problems is legal action against your company by suppliers or the tax office.
  • If these problems sound familiar to you and your business, it is time for you to take immediate action to address your cash flow problems.
  • You are stressed and it is affecting your family as well.

In this article, we take a look at the 5 main causes of cash flow problems in a business.

Knowing these dangers will help you develop effective cash flow management and maintain a healthy business cash flow.

Cause 1 – Declining Sales and/or Declining Gross Profit Margins

a) Declining Sales

  • Declining sales have a devastating effect on your cash flow as a relatively small decline can cause a massive reduction in your profitability.
  • This typically occurs when economic conditions deteriorate, there is an increase in competition from global competitors, new competitors enter your market, or your industry declines.
  • As sales decline your overheads will probably remain unchanged so net profit decreases rapidly.
  • A detailed table in the addendum at the end of this article vividly demonstrates the devastating effect of declining sales.

b) Declining Gross Profit Margins

  • Declining gross profit margins have a devastating effect on your cash flow as a relatively small decline can cause a massive reduction in your profitability.
  • Typically occurs when there is pressure on sales.
  • A detailed table in the addendum at the end of this article vividly demonstrates the devastating effect of declining gross profit margins.

Cause 2 – Your Business Is Unprofitable

  • Simply put, you are spending more than you are charging to provide your customers with goods or services. For example for every $1,000 or 1,000 you charge your customer you are spending $1,050 or 1,050! That is for every $1,000,000 or 1,000,000 you earn you are spending $1,050,000 or 1,050,000!
  • Inevitably your losses will accumulate to the point of having to borrow more money just to stay in business. But eventually you will come to the point where it is neither wise nor possible to borrow more money and you will have to sell your business, close it down, liquidate it, or someone else will liquidate it for you, for example the tax office.
  • A much better solution is to take immediate action to restructure your business to generate strong and sustainable profits, this will probably require a very experienced business turnaround specialist to guide you through this process.

Main causes of lack of profitability include:

  • A flawed business model.
  • An underperforming business, either your sales marketing and/or operations are not working like clockwork.
  • Lack of understanding of financial statements.
  • Lack of accurate and timely financial statements.
  • Lack of KPI s (Key Performance Indicators) and strict monitoring of them
  • Low gross profit margins due to high direct costs and/or not charging enough for your products/services and/or extreme competitive industry pressures.
  • Poor performance and lack of productivity of staff.
  • Poor processes, many errors/defects.
  • Poor stock purchasing and management.
  • Excessive overheads.
  • Excessive interest and/or vehicle and equipment finance commitments.
  • Poor credit approval of customers and poor debtor collection management practices resulting in high bad debts experience.
  • Undisciplined spending.

Cause 3 – You Have a Natural Negative Cash Flow Business Model

  1. You sell on credit terms, 30, 60, or even 90 day terms, but you have to pay your payroll, rent, overheads weeks if not months before you are paid by your customers. And your payment terms with your suppliers are shorter than the payment terms you have given your customers.
  2. You carry imported stock which you have paid for weeks or months before it lands in your warehouse.
  3. You are paid by way of progress claims for which you also provide credit so you receive payment long after you have paid your direct factory expenses or subcontractors and materials expenses. Furthermore, retention payments are withheld by your head contractors or by your customer.

There are ways to address every one of these circumstances which involve redesigning your business model and also using appropriate means of financing, most of which are still available, even if you are already in financial distress.

Cause 4 – Excessive Debt and Capital Expenditure and/or Excessive Personal Drawings/Benefits

  • High repayments due to excessive debt and/or repayment of loans over too short a period. This especially applies to vehicle and equipment loans and lease repayments which are typically structured over relatively short terms with low or nil balloon or residual values.
  • Capital expenditure funded out of cash flow instead of being financed over the useful life of the asset which puts pressure on cash flow.
  • Funding purchase of personal property assets or the repayments on these properties far beyond the capacity of your business to sustain these payments as well as meeting the ongoing payment of all business expenses within normal trading terms including taxes and superannuation.
  • Excessive living and lifestyle expenses.

Cause 5 – Poor Stock or Poor Credit and Debtor Management

  • Poor stock management, such as carrying stock that doesn t sell through, carrying excessive levels of stock, not clearing discontinued or obsolete stock, poor demand planning, undisciplined purchasing habits, or a poor stock management system to name a few.
  • Poor credit management, that is no or poor credit approval processes before providing customers with credit which will sooner or later result in bad debt write offs and in the worst cases will result in failure of the business.
  • Poor debtor management which includes lack of disciplined collection of debts due by customers, allowing continued credit when customers have not paid their bills within company credit terms, and lack of regular reconciling of debtors accounts.

Some Final Words

  • Disciplined cash flow forecasting and management is critical to your business.
  • If you are experiencing some of the above issues in your business you need to address them urgently. Unless you can address these problems immediately you may be wise to engage the services of a very experienced business turnaround specialist to help you effectively plan and manage your cash flow and deal with the root causes of your cash flow problems.

Addendum

a) Detailed Analysis of Impact of Declining Sales

  • In the table below, sales are progressively reduced dramatically reducing net profit margin.
  • Note that all figures are presented as cents in the dollar/pence in the pound. Therefore, by way of explanation for normal sales column:

Sales = 100 cents/pence

Cost of Sales = 65 cents/pence

Gross Profit = 35 cents/pence


Tags : , ,

Cash Flow Story, cash flow business.#Cash #flow #business


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    Tags : , ,
  • Cash Flow Story, cash flow business.#Cash #flow #business


    cash flow business

    Cash flow business Cash flow business

    Cash flow business Cash flow business

    • Cash flow business

    Cash flow business

  • Cash flow business

    Cash flow business

  • Cash flow business

    Cash flow business

    Cash Flow Story What are your numbers telling you?

    Your Cash Flow Story Scorecard produces an automated financial health check on your business, ensuring everyone looks at your numbers in the same way…. whether you are a business owner/manager an advisor or banker.

    Using powerful processes such as the Power of One, the 4 Chapters and the Big 3 Cash Flow measures the Scorecard will enable you to understand your financial story and improve the performance of your business.

    Taking less than 10 minutes to setup, this unique web based Scorecard will deliver powerful analysis of your numbers in an easy to understand format. The Scorecard will bring your numbers to life and enable you to measure the financial impact of your decisions in advance.

    Cash flow business

    CFS Business

    With our business version you can:

    • See your financial story unfold
    • Gain valuable insight into your cash flow
    • Understand what your business is worth
    • Access your story from anywhere

    Learn more about CFS Business

    Cash flow business

    CFS Advisor

    With our advisor version you can:

    • Guide your clients through their financial story
    • Drive improvements to your client’s performance
    • Go from setup to meaningful analysis in under 10 minutes
    • Discuss the story over a coffee on your tablet/iPad
    • Become a financial story teller

    Learn more about CFS Advisor

    At a glance

    Pay attention to the right areas. Hone in on your critical results

    Easy to use

    Web-based, tablet and ipad ready. Understand your business anywhere!

    Fast Results

    Less than 10 minutes to get started and learn about your business

    Intuitive help

    Read the story to fully understand your story.


    Tags : , ,
  • Home Party Plan Training, Cash Flow Show, cash flow business.#Cash #flow #business


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    Tags : , ,

    The 5 main causes of cash flow problems, cash flow business.#Cash #flow #business


    The 5 main causes of cash flow problems

    Cash flow business

    Anywhere in the world, whether you are in Australia, UK, US, Canada, or elsewhere, the causes of cash flow problems are the same!

    CASH IS KING

    • The ability to generate positive cash flow year in year out is essential for a business to be viable in the long term.
    • Surplus cash flow lubricates growth of a business.
    • It is impossible to successfully grow a business unless it is both profitable AND generates surplus cash flow on a sustainable basis.
    • Without strong, positive cash flow a business will never thrive and grow.
    • Inadequate cash flow is a symptom of management problems in a business, NOT the cause.

    Evidence of Cash Flow Problems

    • Late payment or non payment of supplier invoices, direct debits being dishonoured, late payment of taxes and employee superannuation, even worse being late payment of wages to staff.
    • More extreme evidence of cash flow problems is legal action against your company by suppliers or the tax office.
    • If these problems sound familiar to you and your business, it is time for you to take immediate action to address your cash flow problems.
    • You are stressed and it is affecting your family as well.

    In this article, we take a look at the 5 main causes of cash flow problems in a business.

    Knowing these dangers will help you develop effective cash flow management and maintain a healthy business cash flow.

    Cause 1 – Declining Sales and/or Declining Gross Profit Margins

    a) Declining Sales

    • Declining sales have a devastating effect on your cash flow as a relatively small decline can cause a massive reduction in your profitability.
    • This typically occurs when economic conditions deteriorate, there is an increase in competition from global competitors, new competitors enter your market, or your industry declines.
    • As sales decline your overheads will probably remain unchanged so net profit decreases rapidly.
    • A detailed table in the addendum at the end of this article vividly demonstrates the devastating effect of declining sales.

    b) Declining Gross Profit Margins

    • Declining gross profit margins have a devastating effect on your cash flow as a relatively small decline can cause a massive reduction in your profitability.
    • Typically occurs when there is pressure on sales.
    • A detailed table in the addendum at the end of this article vividly demonstrates the devastating effect of declining gross profit margins.

    Cause 2 – Your Business Is Unprofitable

    • Simply put, you are spending more than you are charging to provide your customers with goods or services. For example for every $1,000 or 1,000 you charge your customer you are spending $1,050 or 1,050! That is for every $1,000,000 or 1,000,000 you earn you are spending $1,050,000 or 1,050,000!
    • Inevitably your losses will accumulate to the point of having to borrow more money just to stay in business. But eventually you will come to the point where it is neither wise nor possible to borrow more money and you will have to sell your business, close it down, liquidate it, or someone else will liquidate it for you, for example the tax office.
    • A much better solution is to take immediate action to restructure your business to generate strong and sustainable profits, this will probably require a very experienced business turnaround specialist to guide you through this process.

    Main causes of lack of profitability include:

    • A flawed business model.
    • An underperforming business, either your sales marketing and/or operations are not working like clockwork.
    • Lack of understanding of financial statements.
    • Lack of accurate and timely financial statements.
    • Lack of KPI s (Key Performance Indicators) and strict monitoring of them
    • Low gross profit margins due to high direct costs and/or not charging enough for your products/services and/or extreme competitive industry pressures.
    • Poor performance and lack of productivity of staff.
    • Poor processes, many errors/defects.
    • Poor stock purchasing and management.
    • Excessive overheads.
    • Excessive interest and/or vehicle and equipment finance commitments.
    • Poor credit approval of customers and poor debtor collection management practices resulting in high bad debts experience.
    • Undisciplined spending.

    Cause 3 – You Have a Natural Negative Cash Flow Business Model

    1. You sell on credit terms, 30, 60, or even 90 day terms, but you have to pay your payroll, rent, overheads weeks if not months before you are paid by your customers. And your payment terms with your suppliers are shorter than the payment terms you have given your customers.
    2. You carry imported stock which you have paid for weeks or months before it lands in your warehouse.
    3. You are paid by way of progress claims for which you also provide credit so you receive payment long after you have paid your direct factory expenses or subcontractors and materials expenses. Furthermore, retention payments are withheld by your head contractors or by your customer.

    There are ways to address every one of these circumstances which involve redesigning your business model and also using appropriate means of financing, most of which are still available, even if you are already in financial distress.

    Cause 4 – Excessive Debt and Capital Expenditure and/or Excessive Personal Drawings/Benefits

    • High repayments due to excessive debt and/or repayment of loans over too short a period. This especially applies to vehicle and equipment loans and lease repayments which are typically structured over relatively short terms with low or nil balloon or residual values.
    • Capital expenditure funded out of cash flow instead of being financed over the useful life of the asset which puts pressure on cash flow.
    • Funding purchase of personal property assets or the repayments on these properties far beyond the capacity of your business to sustain these payments as well as meeting the ongoing payment of all business expenses within normal trading terms including taxes and superannuation.
    • Excessive living and lifestyle expenses.

    Cause 5 – Poor Stock or Poor Credit and Debtor Management

    • Poor stock management, such as carrying stock that doesn t sell through, carrying excessive levels of stock, not clearing discontinued or obsolete stock, poor demand planning, undisciplined purchasing habits, or a poor stock management system to name a few.
    • Poor credit management, that is no or poor credit approval processes before providing customers with credit which will sooner or later result in bad debt write offs and in the worst cases will result in failure of the business.
    • Poor debtor management which includes lack of disciplined collection of debts due by customers, allowing continued credit when customers have not paid their bills within company credit terms, and lack of regular reconciling of debtors accounts.

    Some Final Words

    • Disciplined cash flow forecasting and management is critical to your business.
    • If you are experiencing some of the above issues in your business you need to address them urgently. Unless you can address these problems immediately you may be wise to engage the services of a very experienced business turnaround specialist to help you effectively plan and manage your cash flow and deal with the root causes of your cash flow problems.

    Addendum

    a) Detailed Analysis of Impact of Declining Sales

    • In the table below, sales are progressively reduced dramatically reducing net profit margin.
    • Note that all figures are presented as cents in the dollar/pence in the pound. Therefore, by way of explanation for normal sales column:

    Sales = 100 cents/pence

    Cost of Sales = 65 cents/pence

    Gross Profit = 35 cents/pence


    Tags : , ,

    The 5 main causes of cash flow problems, cash flow business.#Cash #flow #business


    The 5 main causes of cash flow problems

    Cash flow business

    Anywhere in the world, whether you are in Australia, UK, US, Canada, or elsewhere, the causes of cash flow problems are the same!

    CASH IS KING

    • The ability to generate positive cash flow year in year out is essential for a business to be viable in the long term.
    • Surplus cash flow lubricates growth of a business.
    • It is impossible to successfully grow a business unless it is both profitable AND generates surplus cash flow on a sustainable basis.
    • Without strong, positive cash flow a business will never thrive and grow.
    • Inadequate cash flow is a symptom of management problems in a business, NOT the cause.

    Evidence of Cash Flow Problems

    • Late payment or non payment of supplier invoices, direct debits being dishonoured, late payment of taxes and employee superannuation, even worse being late payment of wages to staff.
    • More extreme evidence of cash flow problems is legal action against your company by suppliers or the tax office.
    • If these problems sound familiar to you and your business, it is time for you to take immediate action to address your cash flow problems.
    • You are stressed and it is affecting your family as well.

    In this article, we take a look at the 5 main causes of cash flow problems in a business.

    Knowing these dangers will help you develop effective cash flow management and maintain a healthy business cash flow.

    Cause 1 – Declining Sales and/or Declining Gross Profit Margins

    a) Declining Sales

    • Declining sales have a devastating effect on your cash flow as a relatively small decline can cause a massive reduction in your profitability.
    • This typically occurs when economic conditions deteriorate, there is an increase in competition from global competitors, new competitors enter your market, or your industry declines.
    • As sales decline your overheads will probably remain unchanged so net profit decreases rapidly.
    • A detailed table in the addendum at the end of this article vividly demonstrates the devastating effect of declining sales.

    b) Declining Gross Profit Margins

    • Declining gross profit margins have a devastating effect on your cash flow as a relatively small decline can cause a massive reduction in your profitability.
    • Typically occurs when there is pressure on sales.
    • A detailed table in the addendum at the end of this article vividly demonstrates the devastating effect of declining gross profit margins.

    Cause 2 – Your Business Is Unprofitable

    • Simply put, you are spending more than you are charging to provide your customers with goods or services. For example for every $1,000 or 1,000 you charge your customer you are spending $1,050 or 1,050! That is for every $1,000,000 or 1,000,000 you earn you are spending $1,050,000 or 1,050,000!
    • Inevitably your losses will accumulate to the point of having to borrow more money just to stay in business. But eventually you will come to the point where it is neither wise nor possible to borrow more money and you will have to sell your business, close it down, liquidate it, or someone else will liquidate it for you, for example the tax office.
    • A much better solution is to take immediate action to restructure your business to generate strong and sustainable profits, this will probably require a very experienced business turnaround specialist to guide you through this process.

    Main causes of lack of profitability include:

    • A flawed business model.
    • An underperforming business, either your sales marketing and/or operations are not working like clockwork.
    • Lack of understanding of financial statements.
    • Lack of accurate and timely financial statements.
    • Lack of KPI s (Key Performance Indicators) and strict monitoring of them
    • Low gross profit margins due to high direct costs and/or not charging enough for your products/services and/or extreme competitive industry pressures.
    • Poor performance and lack of productivity of staff.
    • Poor processes, many errors/defects.
    • Poor stock purchasing and management.
    • Excessive overheads.
    • Excessive interest and/or vehicle and equipment finance commitments.
    • Poor credit approval of customers and poor debtor collection management practices resulting in high bad debts experience.
    • Undisciplined spending.

    Cause 3 – You Have a Natural Negative Cash Flow Business Model

    1. You sell on credit terms, 30, 60, or even 90 day terms, but you have to pay your payroll, rent, overheads weeks if not months before you are paid by your customers. And your payment terms with your suppliers are shorter than the payment terms you have given your customers.
    2. You carry imported stock which you have paid for weeks or months before it lands in your warehouse.
    3. You are paid by way of progress claims for which you also provide credit so you receive payment long after you have paid your direct factory expenses or subcontractors and materials expenses. Furthermore, retention payments are withheld by your head contractors or by your customer.

    There are ways to address every one of these circumstances which involve redesigning your business model and also using appropriate means of financing, most of which are still available, even if you are already in financial distress.

    Cause 4 – Excessive Debt and Capital Expenditure and/or Excessive Personal Drawings/Benefits

    • High repayments due to excessive debt and/or repayment of loans over too short a period. This especially applies to vehicle and equipment loans and lease repayments which are typically structured over relatively short terms with low or nil balloon or residual values.
    • Capital expenditure funded out of cash flow instead of being financed over the useful life of the asset which puts pressure on cash flow.
    • Funding purchase of personal property assets or the repayments on these properties far beyond the capacity of your business to sustain these payments as well as meeting the ongoing payment of all business expenses within normal trading terms including taxes and superannuation.
    • Excessive living and lifestyle expenses.

    Cause 5 – Poor Stock or Poor Credit and Debtor Management

    • Poor stock management, such as carrying stock that doesn t sell through, carrying excessive levels of stock, not clearing discontinued or obsolete stock, poor demand planning, undisciplined purchasing habits, or a poor stock management system to name a few.
    • Poor credit management, that is no or poor credit approval processes before providing customers with credit which will sooner or later result in bad debt write offs and in the worst cases will result in failure of the business.
    • Poor debtor management which includes lack of disciplined collection of debts due by customers, allowing continued credit when customers have not paid their bills within company credit terms, and lack of regular reconciling of debtors accounts.

    Some Final Words

    • Disciplined cash flow forecasting and management is critical to your business.
    • If you are experiencing some of the above issues in your business you need to address them urgently. Unless you can address these problems immediately you may be wise to engage the services of a very experienced business turnaround specialist to help you effectively plan and manage your cash flow and deal with the root causes of your cash flow problems.

    Addendum

    a) Detailed Analysis of Impact of Declining Sales

    • In the table below, sales are progressively reduced dramatically reducing net profit margin.
    • Note that all figures are presented as cents in the dollar/pence in the pound. Therefore, by way of explanation for normal sales column:

    Sales = 100 cents/pence

    Cost of Sales = 65 cents/pence

    Gross Profit = 35 cents/pence


    Tags : , ,

    Cash Flow Streams, cash flow business.#Cash #flow #business


    Cash Flow Streams

    The Present Value of a Cash Flow Stream is equal to the sum of the Present Values of the individual cash flows. To see this, consider an investment which promises to pay $100 one year from now and $200 two years from now. If an investor were given a choice of this investment or two alternative investments, one promising to pay $100 one year from now and the other promising to pay $200 two years from now, clearly, he would be indifferent between the two choices. (Assuming that the investments were all of equal risk, i.e., the discount rate is the same.) This is because the cash flows that the investor would receive at each point in time in the future are the same under either alternative. Thus, if the discount rate is 10%, the Present Value of the investment can be found as follows:

    PV = $100/(1 + 0.10) + $200/(1 + 0.10) 2

    PV = $90.91 + $165.29 = $256.20

    The following equation can be used to find the Present Value of a Cash Flow Stream.

    Cash flow business

    where

    • PV = the Present Value of the Cash Flow Stream,
    • CFt = the cash flow which occurs at the end of year t,
    • r = the discount rate,
    • t = the year, which ranges from zero to n, and
    • n = the last year in which a cash flow occurs.

    Find the Present Value of the following cash flow stream given that the interest rate is 10%.

    Cash flow business

    Cash flow business

    Future Value

    The Future Value of a Cash Flow Stream is equal to the sum of the Future Values of the individual cash flows. For example, consider an investment which promises to pay $100 one year from now and $200 two years from now. Given that the discount rate is 10%, the Future Value at the end of year 2 of the investment can be found as follows:

    As of year 2, the $100 received at the end of year 1 would have earned interest for one year while the $200 received at the end of year 2 would not yet have earned any interest. Thus, the Future Value at the end of year 2, i.e., immediately after the $200 cash flow was received, is $310.00.

    The following equation can be used to find the Future Value of a Cash Flow Stream at the end of year t.

    Cash flow business

    where

    • FVt = the Future Value of the Cash Flow Stream at the end of year t,
    • CFt = the cash flow which occurs at the end of year t,
    • r = the discount rate,
    • t = the year, which ranges from zero to n, and
    • n = the last year in which a cash flow occurs.

    Find the Future Value at the end of year 4 of the following cash flow stream given that the interest rate is 10%.

    Cash flow business

    Cash flow business

    Cash flow business


    Tags : , ,

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    All About Cash Flow

    While we are trained to think of business as sales minus costs and expenses, which is profits, we have to manage cash as well.

    Although cash is critical, people think in profits instead of cash. We all do. When you imagine a new business, you think of what it would cost to make the product, what you could sell it for, and what the profits per unit might be. We are trained to think of business as sales minus costs and expenses, which is profits. Unfortunately, we don t spend the profits in a business. We spend cash. Profitable companies go broke because they had all their money tied up in assets and couldn t pay their expenses. Working capital is critical to business health. Unfortunately, we don t see the cash implications as clearly as we should, which is one of the best reasons for proper business planning. We have to manage cash, as well as profits.

    A simple example
    One of the best ways to understand the dilemma of cash vs. profits is to follow an otherwise-profitable company going broke because it can t meet its obligations. This is a quick and simple example. It also leads us into the relationship between income statement, balance sheet, and cash.

    Start with $100, which we ll call capital. At the beginning of this exercise, your balance sheet has assets of $100—the money—and capital of $100. Assets are equal to capital plus liabilities. A summary of the simple financial statement at this point is shown in this first illustration, Starting Numbers.

    If you buy a widget for $100 and sell it for $150, you should end up with $50 profit, which is what your income statement covers. Sales minus costs are profit. You should have $150 in the bank. Now your balance sheet shows the same $100 in original capital plus $50 in earnings, which are equal to the $150 you have in cash as an asset. The next illustration shows you how the financials work after the sale.

    Buy another widget for $100 and sell it again for $150, and now you have $200 in the bank. Do it again, you have $250 in the bank. Your income statement shows sales of $450, cost of sales of $300, and profit of $150. The illustration shows your income statement and balance sheet at this point.

    Adding some realism
    Now go back a step and make the situation more realistic. For example, most sales of products to businesses go on terms, with the money due in 30 days. So if you sold that widget on credit you don t have $150 in the bank. You still have $50 in your bottom line, but now you have nothing in the bank. Instead, a customer owes you $150, which is what we call “Accounts Receivable.” Compare the Sell a Widget illustration to this next illustration, Selling on Terms. This is what really happens to the huge number of businesses that sell to other businesses.

    Knowing you can buy a widget for $100 and sell it for $150, you get your Widget supplier to sell to you on the same terms you sell, net 30, instead of for cash. Now you have $100 that you owe to suppliers, which is called “Accounts Payable.” You also have $100 worth of widget in inventory. This gives you the case in the following illustration, Buying on Terms, in which you are now poised to sell another widget and make more profit.

    You have an extra $100 in assets (the widget in inventory) and an extra $100 as liabilities (Accounts Payable), so you are still in balance. Also, you still have no money. Our next illustration shows the financial picture with sales to businesses on credit and purchase of inventory on credit as a short-term debt.

    Now the case is more like what you have with real business numbers, in which you have to manage your cash very carefully, and the amounts sitting in inventory and accounts receivable are significant.

    More realism: working capital
    Even in the case of the above illustration, the example is completely unrealistic. Where are the running expenses, such as rent, salaries, telephones, or even advertising those widgets? How would they affect the cash situation? How far would we get if we couldn t pay the rent or the telephone bill while waiting for customers to pay us? Furthermore, what supplier would give us a widget on credit when we have no history and no assets? What bank would loan us money in this situation? Banks do loan against inventory and receivables, but only to a certain percentage of total value. What was missing here, all along, was working capital.

    Important: In strict accounting terms, working capital is equal to short-term assets minus short-term liabilities. In real terms, however, working capital is the glue that holds your cash flow together. Get it into the bank before you need it, or you won t survive the unexpected.

    The following illustration goes back to the beginning of this whole example and does it right, with enough capital in the beginning to finance the company.

    Instead of starting with $100 as capital, this business looks a lot better with starting capital of $400. With this additional capital from the start, buying on credit and borrowing against assets is more realistic. In this scenario, working capital is up to $550. Now it has a proper input of working capital at the beginning. With even the barest of business plans, we could tell that $100 wasn t enough to get this business going.

    I hope the theoretical examples help make the concepts clear. If you followed these illustrations, you can see some enormous implications for running a business.

    Important: Every dollar in accounts receivable means a dollar less in cash. Every dollar of inventory is a dollar less in cash. Every dollar of accounts payable is a dollar more in cash.

    How LivePlan makes your business more successful

    If you re writing a business plan you’re in luck. Online business planning software makes it easier than ever before to put together a business plan for your business.

    As you ll see in a moment LivePlan is more than just business plan software though. It s a knowledgable guide combined with a professional designer coupled with a financial wizard. It ll help you get over the three most common business hurdles with ease.

    Let s take a look at those common hurdles and see how producing a top notch business plan sets your business up for success.


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    Cash Flow

    What is ‘Cash Flow’

    Cash flow is the net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company’s liquid assets are increasing, enabling it to settle debts. reinvest in its business, return money to shareholders, pay expenses and provide a buffer against future financial challenges. Negative cash flow indicates that a company’s liquid assets are decreasing. Net cash flow is distinguished from net income. which includes accounts receivable and other items for which payment has not actually been received. Cash flow is used to assess the quality of a company’s income, that is, how liquid it is, which can indicate whether the company is positioned to remain solvent .

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    BREAKING DOWN ‘Cash Flow’

    The accrual accounting method allows companies to count their chickens before they hatch, so to speak, by considering credit as part of a company’s income. “Accounts receivable ” and “settlement due from customers” can appear as line items in the assets portion of a company’s balance sheet. but these items do not represent completed transactions, for which payment has been received. They do not, therefore, count as cash. (Note that the credit vs. cash distinction is not the same as it is in everyday terminology; proceeds from credit card transactions are considered cash once they are transferred.)

    The opposite can also be true. A company may be receiving massive inflows of cash, but only because it is selling off its long-term assets. A company that is selling itself for parts may be building up liquidity. but it is limiting its potential for growth in the long term, and perhaps setting itself up to fail. In the same vein, a company may be taking in cash by issuing bonds and taking on unsustainable levels of debt. For these reasons it is necessary to view a company’s cash flow statement. balance sheet and income statement together.

    Cash Flow Statement

    Often called the “statement of cash flows,” the cash flow statement indicates whether a company’s income is languishing in the form of IOUs – not a sustainable situation in the long term – or is translating into cash flow. Even very profitable companies, as measured by their net incomes. can become insolvent if they do not have the cash and cash-equivalents to settle short-term liabilities. If a company’s profit is tied up in accounts receivable, prepaid expenses and inventory. it may not have the liquidity to survive a downturn in its business or a lawsuit. Cash flow determines the quality of a company’s income; if net cash flow is less than net income, that could be a cause for concern.

    Cash flow statements are divided into three categories: operating cash flow. investing cash flow and financing cash flow. Operating cash flows are those related to a company’s operations, that is, its day-to-day business. Investing cash flows relate to its investments in businesses through acquisition ; in long-term assets, such as towers for a telecom provider; and in securities. Financing cash flows relate to a company’s investors and creditors: dividends paid to stockholders would be recorded here, as would cash proceeds from issuing bonds.

    Free cash flow is defined as a company’s operating cash flow minus capital expenditures. This is the money that can be used to pay dividends. buy back stock. pay off debt and expand the business.

    Real World Example

    Below is a reproduction of Wal-Mart Stores Inc.’s (WMT ) cash flow statement for the quarter ended April 30, 2015. All amounts are in million of U.S. dollars.

    Cash flows from operating activities:


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