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HocheiserCPA Blog
Where is Your Cash?

Where is Your Cash?

Cash Flow
Cash Flow – the life blood of all businesses and households. So why is it one of the most misunderstood of core concepts? Too often the bank account register serves as the cash flow metric. Sadly, many business owners and individuals fail to keep even this most basic of tools up to date. Instead, they fall back on checking their bank balance on line or at the ATM machine.

Profitable businesses can fail. Profitable and growing businesses can fail. Not from a sudden reversal of fortune but because they ran out of cash and available credit. How could this happen, someone might ask. The answer is fairly simple. One or more of the three most important metrics of cash flow were either not prepared or were prepared incorrectly.

What are those three metrics? The first one is the Statement of Cash Flows, the second is the cash flow cycle, and the third is cash budgeting.

The Statement of Cash Flows tells you three very simple, but extremely important, pieces of information. The change in the amount of cash that is tied up in working capital (primarily accounts receivable, inventory, and accounts payable), how much cash was expended for capital purchases (items expected to last several years like a car or machine), and how much cash was used to pay down debt or how much cash was borrowed to fund operations.

The second, the cash flow cycle is even more important. This is because the Statement of Cash Flows is a backward looking measure telling you what happened. The cash flow cycle is forward looking. Businesses that are in retail, manufacturing, construction and many others that produce physical or sell tangible goods face a common and crucial to understand situation. Money is spent on inventory, labor, supplies and normal operating expenses. However, the money spent on inventory, labor and supplies is not collected until sometime in the future. During this time enough cash is required to fund these expenditures and normal operations until payment is received from the customer. There are many variables that will be discussed in a future posting.

The final item, cash budgeting, is perhaps the most critical. It helps define policies concerning accounts payable, accounts receivable, inventory, supplies, and operating expenses. These policies contribute significantly in determining the cash flow cycle and require a constant monitoring between the budget and actual results.

I have just briefly touched on these matters. In future posts they will be explored in more detail and with examples.

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