From Gregacct.com archives If there's one secret to running a successful business, it's
learning how to manage your cash. All business, no matter how
small or large, function on cash. Many businesses become
insolvent because they do not have enough cash to meet their
short term obligations; bills must be paid in cash not profits.
Sufficient cash is, one of the keys to maintaining a successful
business. Therefore, you must understand how cash moves through
the business and how planning can remove some of the uncertainties
about future requirements.
CASH CYCLE
In any business there is a continual cycle of events
which may increase or decrease the cash balance.
Cash is decreased in the acquisition of materials and services to
produce the finished goods. It is reduced in paying off the
amounts owed to suppliers; that is, accounts payable. Then,
inventory is sold and these sales generate cash and accounts receivable;
that is, money owed from customers. When customers pay, accounts
receivable is reduced and the cash account increases. However, the
cash flows are not necessarily related to the sales in that period
because customers may pay in the next period.
The small business manager must continually be alert to changes in
working capital accounts, the cause of these changes, and the
implications of these changes for the financial health of the
company.
NET WORKING CAPITAL
Current assets are those resources of cash
and assets which can be converted to cash within one year or a
normal business cycle. These include cash, marketable securities,
accounts receivable, inventories, ect. Current liabilities are
obligations which become due within one year or a normal business
cycle. These include accounts payable, notes payable, accrued
expenses payable, ect.
One way to measure the flow of cash and the company's ability to
maintain its cash or liquid assets is to compute working capital.
Working capital is the difference between current assets and
current liabilities. The change in this amount from period to
period is called Net Working Capital. If new working capital
increased during the period, it could have been all in cash or
all in inventory, or it may have resulted from a reduction in
accounts payable.
CASH FLOW STATEMENT
While net working capital shows only the
changes in the current period, a cash flow statement can be
developed to explain the changes that have occured in any account
during any period. The cash flow statement is an analysis of
the cash inflows and outflows.
The ability to forecast cash requirements is indeed a means of
becoming a more efficient manager. If you can determine the cash
requirements for any period, you can establish a bank loan in
advance, or you can reduce other current asset accounts so that
the cash you need will be available. Also, if you have extra cash
you will know it and be able to put into productive use, earning a
return on it.
