Cash flow refers to the movement of cash into or out of a business, a project, or a financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used

• to determine a project’s rate of return or value. The time of cash flows into and out of projects are used as inputs in financial models such as internal rate of return, and net present value.
• to determine problems with a business’s liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash, even while profitable.
• as an alternate measure of a business’s profits when it is believed that accrual accounting concepts do not represent economic realities. For example, a company may be notionally profitable but generating little operational cash (as may be the case for a company that barters its products rather than selling for cash). In such a case, the company may be deriving additional operating cash by issuing shares, or raising additional debt finance.
• cash flow can be used to evaluate the ‘quality’ of Income generated by accrual accounting. When Net Income is composed of large non-cash items it is considered low quality.
• to evaluate the risks within a financial product. E.g. matching cash requirements, evaluating default risk, re-investment requirements, etc.

Cash flow is a generic term used differently depending on the context. It may be defined by users for their own purposes. It can refer to actual past flows, or to projected future flows. It can refer to the total of all the flows involved or to only a subset of those flows. Subset terms include ‘net cash flow’, operating cash flow and free cash flow.

Statement of Cash Flow in a Business’s Financials

Cash flows are classified into:

1. Operational cash flows: Cash received or expended as a result of the company’s internal business activities. It includes cash earnings plus changes to working capital. Over the medium term this must be net positive if the company is to remain solvent.
2. Investment cash flows: Cash received from the sale of long-life assets, or spent on capital expenditure (investments, acquisitions and long-life assets).
3. Financing cash flows: Cash received from the issue of debt and equity, or paid out as dividends, share repurchases or debt repayments

All three together – the net cash flow – are necessary to reconcile the beginning cash balance to the ending cash balance.

Ways Companies Can Augment Reported Cash Flow

Common methods include:

• Sales – Sell the receivables to a factor for instant cash. (leading)
• Inventory – Don’t pay your suppliers for an additional few weeks at period end. (lagging)
• Sales Commissions – Management can form a separate (but unrelated) company and act as its agent. The book of business can then be purchased quarterly as an investment.
• Wages – Remunerate with stock options.
• Maintenance – Contract with the predecessor company that you prepay five years worth for them to continue doing the work
• Equipment Leases – Buy it
• Rent – Buy the property (sale and lease back, for example).
• Oil Exploration costs – Replace reserves by buying another company’s.
• Research & Development – Wait for the product to be proven by a start-up lab; then buy the lab.
• Consulting Fees – Pay in shares from treasury since usually to related parties
• Interest – Issue convertible debt where the conversion rate changes with the unpaid interest.
• Taxes – Buy shelf companies with TaxLossCarryForward’s. Or gussy up the purchase by buying a lab or O&G explore co. with the same TLCF.

From Wikipedia, the free encyclopedia

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Cash Flow Planning for Solo Professionals

By: Kristine McKinley

You’ve heard it a million times – cash can make or break a business. Lack of cash flow planning is the reason why many businesses fail. In fact, many PROFITABLE businesses fail because of cash flow issues. Without adequate cash, you can’t pay your bills and you can’t make plans for your business.

So… what is cash flow planning? Cash flow planning is projecting your future cash inflows from sales, services, and loans, and comparing them to your future cash needs (suppliers, salaries/wages, loan payments, taxes, etc.). The difference between the two is your net cash flow.

Why is cash flow planning so important? Cash flow planning can help you identify problems down the road, and fix them before they occur. It can also help you make decisions such as should I attend that conference I’ve wanted to attend, should I buy the new computer I’ve been wanting, or do I need to work extra hard this month to avoid a cash deficiency next month?

The first step in planning your cash flow is knowing where you spend your money! Solo entrepreneurs need to have a good grip on both their personal and business spending, as most solo entrepreneurs rely on their business income to meet personal finance goals (i.e., pay the bills!). So, you should track both your personal and your business spending, although I recommend that you keep them separate (that’s a topic all by itself).

What’s the best way to track your spending? You can use pen & paper, spreadsheets or a software program. The best method for you is the method that you will actually use on a regular basis.

You should project your spending for at least the next 12 months so that you include annual and other periodic expenses. If you are experiencing a cash flow crisis, you should track & project your cash flow on a weekly basis, instead of monthly.

If you are an existing business, you can project your cash flow for the next year by reviewing your expenses for last year. If you are a new business, you will need to estimate your start up costs in addition to regular operating expenses.

Start up costs include inventory, legal expenses, advertising, licenses & permits, supplies, and many more costs that you may not have thought of. To research startup costs you should contact your local Small Business Development Center, contact a SCORE counselor, join groups of similar business owners, and read as many books or articles you can find on the subject.

To improve your cash flow, you should:

1. Complete the first 3 steps. You have to understand cash flow planning, track your cash flow, and project your future spending needs before you can improve your cash flow.

2. Create best and worst case scenarios and create appropriate responses to both scenarios. For example, if your best case scenario is to increase sales by 50%, how will you use the profits? Will you put the profits back into the company by investing in new equipment, training, etc.? If your worst case scenario is a drop in sales by 50%, how will you continue to cover your monthly expenses? By planning for the best and worst case scenarios, you’ll be ready for any situation.

3. When estimating your future income, realize that some people will pay late, and account for that fact in your projection.

4. Charge what you’re worth. Many businesses, especially service professionals, under-charge when they are first starting out. This is a great way to go out of business. Make sure you are charging what you’re worth, and remember you’re in business to make money, not to give your expertise away for free.

5. Watch your business spending. Focus on the value the item brings to your business, and avoid lavish spending (i.e., do you really need the fastest, newest computer available?).

6. Don’t hire until necessary. Consider using virtual assistants or temporary employees before hiring permanent employees.

7. Give incentives for early payment for products and services. On the flip side, chase down invoices the minute they’re late. Charge interest or late fees to encourage timely payments.

8. Update your projection regularly. Your cash flow plan will change frequently as your business grows. You may want to update it weekly when you first get started, then switch to monthly once you’ve got a good handle on your cash.

Remember – whether you are a new or growing business, your cash flow projection can make the difference between success and failure.