Cash Flow, Essential For Business Success.

What is cash flow?

Cash Flow is the movement of money into and out of a business, which result from payment to the

company (sales, debtors) and payments by it (suppliers, expenses). The first step towards creating positive

cash flow is that the business must generate net profit and must be able to pay its long-term loans and

capital expenses out of the net profit. This will, over a period of time lead to build up of Working Capital,

which can then be used to enhance and improve the business.

In accounting terms, cash flow is the amount of money that a business receives and spends during a

particular period of time. It’s not sales made on credit. It is money you have physically collected and can

really spend. A look at the cash flow statement can provide insight into a company’s financial position and

its ability to remain solvent in the short term.

To main reason business owners are confused between net profit and cash flow (and also why these two

amounts are hardly ever the same) is because the income and expense statement shows the value of all

sales made during a period as soon as the deal is done. Payments however for these sales may only be

received at a later stage thus although the income statement shows that the business has made a profit

and therefore in reality the business has made money, this money is not yet available as cash flow and

cannot be spent.

Let’s look at an example. You manufacture coffee mugs and invest R10 000 of your own money to

purchase the raw materials you need to manufacture your coffee mugs. You then sell the coffee mugs to a

retailer for R13 500 which means you made R3 500 on the deal. Now let’s say that your agreement with

the retailer allows him to only pay you 30 days later for the mugs. This means that in the meantime you do

not have any additional stock to sell to anyone else, nor do you have the raw material to manufacture more

mugs and you have no cash to purchase new raw materials until the retailer has paid you. Yet you’ve

made R3 500 in profit.

Can you see that there is actually a disparity between the net income and cash flow? As an entrepreneur,

you are generating profits from your business, yet still don’t have enough cash to spend on labour and

materials – money has been made but it hasn’t been collected yet. Can you also imagine the impact it

would have on your business if the retailer took three months or even six months to pay you? Using accrual

accounting, the business still shows a profit, but what about the bills it has to pay during the tree or six

months that pass? It will not have the cash to pay them, despite the profit earned on the sale.

You’ve probably heard the saying” Cash is king” Well going back to the rhyme – cash is reality. Now you

know what it means and why you should take it to heart. Don’t fall prey to your sales success by running

out of cash.

A negative cash flow occurs when you don’t have enough cash to fund your business. For example:

· Your expenses exceed your gross profit Rand value

· You exceed your purchases budget

· You pay your creditors too soon

· Your debtors pay you late

New businesses must be especially careful to combat negative cash flow. Negative cash flow or cash flow

problems often occur within the first year of trading. Remember the following:

· Do not be tempted to overspend during this period

· Be aware of debtors and debtors growth

· Control stock levels

· Set up credit terms with your suppliers

Cash Flow forecasting is an attempt to predict what money will flow into the business and how much will

flow out during a particular period in the future. It is simply an educated estimate of what you are expecting

to happen to your business in the near future. It is advisable, if possible or realistic, to comparing estimates

with actual figures at the end of each month, you will soon develop a very accurate system of forecasting.

The advantages of forecasting your cash flow and monitoring it on a periodic basis are:

· You are better able to control creditors

· You are better able to plan expenditure

· You are better able to control any overdraft

· You can use less money to fund the business

It is important to forecast cash flow as sometimes unexpected events occur which can seriously affect your

business and which you did not budget for and by doing a cash flow forecast you can make provision for

those unexpected cost. A cash flow forecast will also determine your money needs in the future – your

bank manager will be far more willing to assist you with an overdraft if you can clearly lay out your needs.

When preparing your cash flow forecast, you must take all income & expense channels into account.

Over six weeks, we will provide you with motivation, resources and advice on one of the most important parts in your business – Cash Flow. Join us in this quest to better understand your finances as a tool for business success. Click here to register and pay by credit card, or click here to pay by EFT.

After actively participating in this campaign you will:

- Understand why Cash is King

- Learn about various Cash flow solutions

- Know how to apply cash flow planning and management

- Receive tips to keep costs in your business under control

- Learn to calculate and interpret financial performance