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Return To Cashflow Article Archive   Search the Article Archives Cash Flow Terminology and the Business Owner By David Willetts Small business owners often fail to understand the consequences of inadequate cash flow management until the harsh realities of business life kick in. Typically one significant occasion is when insufficient funds are available within the business to meet the business liabilities. It may be that business plans have been developed, income statements prepared and cash flows projected. 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. About the Author: David Willetts is a qualified accountant and an Associate of the Institute of Business Advisers. More details on Davids background and experience can be found at http://www.dawconsulting.co.uk and visit http://www.sme-business-solutions.com for solutions to your business problems. Cash Flow Chart

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