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The business owner may have been actively involved in this work or may
have delegated the task to a third party and treated the business planning process
as a desk top exercise.
Following the completion of the plans and reports, what follow up action
was taken?
Were those same plans filed, not subsequently reviewed and no corrective
actions taken to bring any actual results that were worse than forecast
back to plan?
If this scenario is familiar a contributory factor may be a lack of
understanding of what the terminology used actually means that may scare
the business owner from taking action.
To help enhance the knowledge of the small business owner some of the
common terms associated with cash management are explained below.
Cash Balance
The amount of money belonging to the business and available to
legitimately expend, or the amount of money the business owes to a
financial institution usually by way of a bank overdraft facility.
Cash Flow
Simply cashflow is the difference between monies coming into the
business and monies going out of the business, and measured across a period
of time. The measurement may be a day, a month, year or such period the
business owner may determine.
Actual Cash Flow Statement
This is an analysis of all cash flow movements during the given period
of time. It will summarize all monies received and monies expended.
There are three elements to consider and report on. These are:
- the operating activities
o cash flow from selling goods
o cash flow from paying expenses
- the changes in fixed assets
o cash flow from sale or purchase of assets
- the changes in forms of finance.
o Cash flow from borrowing or repaying loans
o Cashflow movements in contributions by and
distributions to owners
Cash Flow From Operations
This is the part of the cash flow that is directly attributable to the
performance (profitable or otherwise) of the business. Excluded from these
numbers would be cash movements related to items such as extraordinary
events and sale or purchase of assets.
Cash flow from operations is the sum of the profit for the period in
question plus the value of the non-cash items, such as depreciation, that
have been charged against profits. To this figure is added or subtracted
the movement in working capital during the period to give the Cash Flow
from Operations.
Cash Flow from Non-Operational Activities
Included under this head will be included all cash movements arising
within the business not directly associated with normal trading activities.
This will include but not limited to the sale or purchase of fixed
assets, for example plant and machinery and furniture and fittings;
together with an increase in or repayment of business loans.
Source and Application of Funds
This term is used to differentiate between the monies coming into a
business and the monies going out.
Monies coming into a business will be the source and will include sales
cash received, proceeds from the sale of a fixed asset and the increase in
loans borrowed.
The application of funds relates to cash that is expended by the business,
and would include the payment of goods or services, the purchase of fixed
assets or the repayment of business loans.
Forecast Cash Flow Statement
A similar convention to the Actual Cash Flow Statement, however, this
will project the anticipated cash flow movements for some future period of
time.
Cash Accounting
A method of accounting that records in the books of account cash
receipts as a sale on the day the cash is received and treats cash payments
as expenses on the day of payment.
Profit v. Cash
The profit of a business should not be confused with the cash position
of the business. A satisfactory cash flow position will almost certainly be
dependent upon profits being generated. However, remember that high
non-operational cash outgoings may significantly reduce the operational
cash generated resulting in a cash balance much lower than the reported
profit.
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About The Author
David Willetts is a qualified accountant and an Associate of the
Institute of Business Advisers. More details on David’s background and
experience can be found at http://www.dawconsulting.co.uk.
Also if you are seeking a solution to your business problem then visit
David's site at http://www.sme-business-solutions.com
for your on line business resource.
The article can be freely distributed to others PROVIDED THAT it at
all times remains unaltered and includes the author's bio.
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