Understanding cash flow to correct potential cash flow problems
My daughter is taking an introductory business management course. I certainly believe it's essential that higher education incorporates this knowledge, but my greatest satisfaction is that she also enjoys the subject matter, because it brings her a little closer to me. Last week she surprised me with a question: "What is cash flow?"
Cash flow is a financial statement that shows the inflows and outflows of money that a company's business activities record over a period of time. To understand it, it's very important to remember that not everything sold is paid for immediately, nor is everything purchased paid for in cash, because credit exists.
Therefore, in business activity we distinguish between two streams: the economic and the monetary. The economic stream encompasses the activity we carry out daily, very simply put, sales and purchases. The difference between sales and purchases is the Result (profit or loss). If all that activity were collected and paid in cash, that Result would be the money we would have in the bank (if it's positive) or that we would owe the bank (if it's negative).
But businesses use credit, and that changes things. Businesses help their customers pay by giving them payment terms, for example, and they also defer payments to their suppliers. So, if I subtract uncollected sales from sales and unpaid purchases from purchases, I end up with a very different "result" than before: the money I've generated or needed during that period, my bank balance.
I believe the best way to approach problems is to create simple models, and once understood, gradually increase their complexity. The previous model is very simple, but I think it helps to understand the concept. Now we could make it more complex by incorporating investments, public administrations, salaries, loans, insurance policies, leases, rentals, and so on
Cash flow can explain all the inflows and outflows of money (we call it cash flow, a literal translation from English) and helps us structure the best financing for our company. That's why the Business Plan always includes the calculation of the project's Cash Flow, determines the treasury needs, and proposes how to finance them.
Count on us to develop your #businessplan
Pau Riera. Financial Area
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A Àmbit Assessor, SL has 40 years dedicated to the tax, comptable and labor consultancy of the Pime.
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