Good cash flow is an important part of running a successful business. Managing all the overheads and having a surplus, are the signs of a strong and healthy business. Here is the short-guide on cash flow and its related topics just to help business owners to better understand the cash flow and other related processes to make their business more healthy and profitable.

What Is Cash Flow?

Cash flow is basically the cash that a business receives or disburse during a specific period of time. The more cash amount coming in than out is called positive cash flow. And the amount coming in less than the amount going out is called negative cash flow.

What Is Cash Flow Statement?

Cash flow statement is a document that shows how much cash is generated by your business over a specific period of time and where it is used. Cash flow statement is the main statement that most of the business analyst use in making the three statement model.

What is Three Statement Model?

Based on the nature of transaction, the cash flow is categorized in three major categories, operating, investing, and financing activities.

  1. Operating Activities

These activities are related with the net income. It measures the cash generated by the business or cash generated from some business operations. These operations include, depreciation, amortization, and changes in working capital.

  1. Investing Activities

This measures the sales and purchase of business’ long-term investments including capital acquisitions, spending, investments in stocks and bonds. Due to its investment in itself nature, this type of cash flow is considered negative.

  1. Financing Activities

This type measures the funding activities of a business and its shareholders/stakeholders. This also measures the issuing or purchasing of stock, debt repurchasing as well as paying dividends to business’s shareholders.

What Is Total Cash Flow?

The sum of the operating, investing, and financing activities produces total cash flow. Basically it is the total of all inflowing and outflowing cash. To calculate the total cash flow, you need to calculate your total estimated receivables from your sales.

What Is Free Cash Flow (FCF)?

If you want to see the actual profitability of your business, free cash flow is the best metric to calculate it. Free cash flow is a metric that help businesses to measure their generated cash after accounting for capital expenditures. Business expansion, paying dividends, reducing other debts can be managed with this cash. To calculate your free cash flow, you need business cash flow statements and subtract the cash flow from your business operations from your overall capital expenditures.

What Is Cash Flow Projection?

Cash flow projection helps you to make assumptions each month to know where your business is standing. Based on the result of your business’ cash flow projections, you can continue doing your business as you are currently doing or to make another financial plan. For better and accurate cash flow projections, you need to consider your receivables and payables.

How To Calculate Cash Flow Projections?

To calculate the projected cash flow, take the amount of cash that your business has in its starting phase. Estimate how much cash you are expecting to generate. The incoming cash consist of business revenue, your previous loans as well as your previous sales that were made on credit. By getting these numbers and evaluating the trends, forecast your future sales. Estimate the incoming cash you will have in the future as well as all other future expenses. Then subtract the estimated expenses from estimated income. The resulting number is your cash flow.

How Does Cash Flow Help A Business?

Cash flow help businesses to manage businesses expenses. It also help in planning and organizing expenses. A positive cash flow can help you to improve your incoming cash flow, help you in paying your dues and bills in a smarter way. Last but not least, positive cash flow can help your business survive in lean months.

What Is The Difference Between Net Income And Net Cash Flow?

Cash flow is the measure that reports on how much cash is coming in and out of the business. It also describe the sustainability of a business. In fact cash flow is an important factor to focus on. However on the other hand, net income is calculated by subtracting the total expenses from the revenue, these include the overheads and other expenses such as product/service costs.

How Can A Business with Net Loss Show Positive Cash Flow?

Depreciation expense can cause this situation. Basically it is the amount of depreciation that is reported on the statement. It reduces the business’ net profits; however it doesn’t comprise other cash payments that are made in the current period.

Have Questions?

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The Beginners Guide to Cash Flow | Merchant Advisors
The Beginners Guide to Cash Flow | Merchant Advisors
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Cash flow is an important term in small business vocabulary. Here is a basic guide on cash flow and learn what it is and how to avoid cash flow problems.
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