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Understanding cash flow cycle and cash flow projections and their impact on your business!

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Cash Flow Cycle

Cash is king” and in tough economic times, managing a business for profitability and survival becomes number one priority. The cash flow statement is the most important financial planning tool available to business owners and their executives. The cash flow statement provides a format that shows where and when cash flows in and out of business over a given period of time: monthly, quarterly, and annually. The same format allows you to forecast your cash flows for future periods of time and is called the cash flow projection. They help you to predict whether the sales or income you forecast will cover the costs of operation. Additionally, the projection allows you to analyze profitability of a project.

By carrying out a Cash Flow projection on a spreadsheet package you can investigate the impact of changing factors within the projection. A structured spreadsheet enables business owners to immediately see the changes. As a result, business owners are able to project the borrowing needs.

Understanding cash flow:

 It’s simply the movement of cash in and out of your business when sales are finalized and expenses are paid. Below is the Cash Flow Cycle.

Cash Flow Cycle

As seen in the above diagram, the cycle involves purchasing inventory, converting that inventory to cash or accounts receivable by selling your products, collecting the accounts receivable, and paying suppliers. Some suppliers offer trade credit which is the primary source of credit. In some cases where the trade credit is not available or the account receivable is slow, the business needs to have a secondary source of credit. The secondary source of credit is a bank line of credit. You can learn about bank lines of credit here.

Business consultants and advisors can help small to medium-sized business owners to put together the cash flow reports and projections. These two reports along with other reports will improve your profitability and your business bottom line.



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