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A majority of the businesses around the world are small businesses. According to\u00a0OECD data<\/a>, the figure is 99%. Another thing they have in common is cash flow problems. Regardless of whether a business is in an advanced economy, emerging area or somewhere in between, cash flow and cash flow basics are a universal lifeblood and stumbling block.<\/p>\r\n\r\n\r\n\r\n In the United States alone, most small to medium-sized businesses (SMEs) only have enough cash on hand to cover 27 days of\u00a0normal costs<\/a>\u00a0of doing business. Even the superstars, the top 25% of SMEs only have two months of cash reserves to fund their businesses.<\/span><\/p>\r\n<\/blockquote>\r\n\r\n\r\n\r\n We don\u2019t believe that any SME ever intentionally overlooks its cash flow basics. It\u2019s just matter of finding the right resources to explain the concepts and the best tools to manage financial health.<\/p>\r\n\r\n\r\n\r\n That\u2019s why we\u2019re providing an overview of some of the basic cash flow concepts and terms. It\u2019s not a glossary so the words won\u2019t be in alphabetical order. Instead, they\u2019ll be grouped by concept in order to add context to each explanation.<\/p>\r\n\r\n\r\n\r\n In its simplest form,\u00a0cash flow<\/strong>\u00a0is the amount of money the comes in or out of a company. A primary indicator of financial health, cash flow shows how efficiently a business is running and if that business is able to pay its bills and keep the lights on.<\/p>\r\n\r\n\r\n\r\n A business that\u2019s\u00a0cash flow positive<\/strong>\u00a0has enough money available to meet its current and most-pressing financial obligations. A business that\u2019s\u00a0cash flow negative<\/strong>\u00a0has more debt than income and might struggle to meet its financial responsibilities.<\/p>\r\n\r\n\r\n\r\n There are instances where a company is cash flow negative and is doing so intentionally, such as going through a launch or investment phase. However, in most cases, unless it\u2019s planned or managed, most businesses would prefer to be cash flow positive.<\/p>\r\n\r\n\r\n\r\n Income earned through sales, assets that can easily be converted into cash and funding, are called\u00a0inflows<\/strong>. Cash used to pay for expenses and investments are referred to as\u00a0outflows<\/strong>.<\/p>\r\n\r\n\r\n\r\n Some more cash flow basics every business should know are the difference between recurring cash flows and one-time cash flows.<\/p>\r\n\r\n\r\n\r\n A\u00a0recurring positive cash flow<\/strong>\u00a0is a predictable, reliable income source, like retainer or subscription fees billed to customers, while\u00a0recurring negative cash flow<\/strong>\u00a0is a consistent expense, like payroll.<\/span><\/p>\r\n<\/blockquote>\r\n\r\n\r\n\r\n A\u00a0one-time positive cash flow<\/strong>\u00a0(sit down for this) is a singular influx of cash. One example would be cash from the sale of equipment, land or facilities. A\u00a0one-time negative cash flow<\/strong>\u00a0would be a large purchase or expense, such as an insurance deductible for flood damage.<\/p>\r\n\r\n\r\n\r\n In the same vein, a\u00a0fixed cost<\/strong>\u00a0is something like leasing costs for office or retail space. No matter how many widgets you sell, you\u2019re still paying a set rate for your kiosk. This is another shocker: A\u00a0variable cost<\/strong>\u00a0changes. These are things like fuel, utilities and raw materials.<\/p>\r\n\r\n\r\n\r\n Long story short, in most cases, you want your recurring positive cash flows to be greater than you recurring negative cash flows. You also want to be aware of your fixed costs and do as much as you can to control or plan for changes in variable costs.<\/p>\r\n Get more tips: How to read a cash flow statement.<\/a><\/em><\/strong><\/p>\r\n\r\n\r\n\r\n There are three fundamental financial statements for tracking and measuring a business\u2019\u00a0financial health<\/a>:<\/p>\r\n\r\n\r\n\r\n As per its name, a\u00a0profit and loss statement<\/strong>\u00a0compares revenues against costs and expenses to determine if a company is profitable. A\u00a0balance sheet<\/strong>\u00a0compares what a business owns to what it owes in order to indicate the amount of\u00a0working capital<\/strong>, cash reserves available to cover near-term commitments and recurring expenses.<\/p>\r\n\r\n\r\n\r\n A\u00a0cash flow statement<\/strong>\u00a0brings information from the profit and loss statement and balance sheet together by analyzing the\u00a0flow of cash<\/a>\u00a0through the company in terms of day-to-day operations, capital investments and financing activities. (This is one of those cash flow basics to remember.)<\/span><\/p>\r\n<\/blockquote>\r\n\r\n\r\n\r\n Every business financial statement has a specific function. What a cash flow statement does differently is that it helps identify patterns in terms of how and when money is coming into or leaving a business.<\/p>\r\n\r\n\r\n\r\n Publicly traded corporations have to share their cash flow statements. The average small business doesn\u2019t. Instead, for SMEs, its cash flow basics and measurements are vital financial management tools.<\/p>\r\n\r\n\r\n\r\n While business models and structures vary, most SMEs will pay the most attention to operational cash flow as part of their cash flow analysis and forecasting.<\/p>\r\n\r\n\r\n\r\n The difference between cash and accrual accounting and how each one calculates net income lies at the heart of the\u00a0direct and indirect methods<\/strong>\u00a0for reporting operational cash flow.<\/p>\r\n\r\n\r\n\r\n Operational cash flow is singled out because it\u2019s the main areas affected by differences in how inflows and outflows are tracked. Warning: It\u2019s a little dry for the next few paragraphs, get ready to skim\u2026<\/p>\r\n\r\n\r\n\r\n Businesses that use cash-based accounting are able to easily use the direct method. This is because they\u2019ve already tracked the actual cash movements in and out of the business as part of the net income.<\/p>\r\n\r\n\r\n\r\n As most small businesses use the accrual system, the indirect method requires that flow of cash be added back in when net income is entered into the cash flow statement.<\/span><\/p>\r\n<\/blockquote>\r\n\r\n\r\n\r\n When you use the indirect method, you have to account for the actual amounts that come in and out, like\u00a0accounts receivable<\/strong>\u00a0(money coming in from customers) and\u00a0accounts payable<\/strong>\u00a0(the money you owe to others).<\/p>\r\n\r\n\r\n\r\n And that\u2019s more detail than you probably ever wanted to know about the direct and indirect method. (So much for just cash flow basics.) Big picture: Whether you scramble or poach your eggs, in the end, you\u2019re still eating eggs.<\/p>\r\n\r\n\r\n\r\n If you\u2019re curious, when you request a\u00a0free cash flow forecast<\/a> from Forwardly, we use the indirect method in our calculations.<\/em><\/p>\r\n\r\n\r\n\r\n One of the cash flow basics that every overview should cover is all the terms that relate to management and monitoring.\u00a0Cash flow management<\/strong>\u00a0refers to the entire process of monitoring your cash flow from the creation of cash flow statement to analyzing the results.<\/p>\r\n\r\n\r\n\r\n The process starts by creating a weekly or monthly cash flow statement. Once the statement is complete, you can perform a\u00a0cash flow analysis<\/strong>\u00a0or deep dive on the numbers.<\/p>\r\n\r\n\r\n\r\n Cash flow forecasting\u00a0<\/strong>(cash flow projections) are the\u00a0inferences and predictions<\/a>\u00a0drawn from the regular creation and analysis of cash flow statements. A\u00a0cash flow forecast<\/strong>\u00a0is a report that contains these interpretations.<\/span><\/p>\r\n<\/blockquote>\r\n\r\n\r\n\r\n Then there\u2019s a\u00a0cash flow budget<\/strong>\u00a0that compares the projections in a cash flow forecast with the actual numbers reported in your cash flow statements.<\/p>\r\n\r\n\r\n\r\n When you bring all these details together to determine how much cash moves in and out of your business and when it happens, you have a\u00a0cash flow cycle<\/strong>\u00a0(cash conversion cycle).<\/p>\r\n\r\n\r\n\r\n It\u2019s sort of like a Russian nesting doll with the cash flow statement as the smallest doll and forecasting and budging being the next sizes up. Each level of detail and analysis builds up to create a larger whole.<\/p>\r\n\r\n
Cash flow basics 101 \u2014 A definition of cash flow\u00a0<\/strong><\/h2>\r\n\r\n\r\n\r\n
Inflows, outflows and everywhere your cash goes<\/strong><\/h2>\r\n\r\n\r\n\r\n
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A cash flow statement explained<\/strong><\/h2>\r\n\r\n\r\n\r\n
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The direct versus the indirect method of reporting cash flow\u00a0<\/strong><\/h2>\r\n\r\n\r\n\r\n
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Cash flow management and monitoring \u2014 the basics<\/strong><\/h2>\r\n\r\n\r\n\r\n
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