Financial Analysis LAP 6 Count the Cash Financial Analysis LAP 6

Objectives Describe the importance of cash flow. Describe the components of a cash flow statement.

Describe the importance of cash flow. Objective Describe the importance of cash flow.

When you owe more money than you have– Your cash flow is out of balance. You may not be able to pay all of your bills. You may need to borrow money from a family member or a friend. Not a situation you want to be in very often Businesses sometimes are in the same situation. Businesses monitor their cash flow to avoid this problem.

Importance of Cash Flow Cash—it makes the world go around. Businesses need cash to operate. Need to manage their cash flow: The movement of funds into and out of a business Determine the amount of cash they have to work with at any given time

Cash Flows Into a Business From Five Main Sources Start-up money Sale of products Loans Interest Sale of assets

Main Sources of Cash Flowing Out of a Business Operating expenses Cost of goods sold Assets Loan payments Taxes Miscellaneous

Monitor Cash Flow To build a cash surplus when sales are up Creates a safety net for the slow time Keeps the cash flow balanced

Describe the components of a cash flow statement. Objective Describe the components of a cash flow statement.

Cash Flow Statement Best guess, or estimate, as to when, where, and how much money will flow into and out of the business Tells the business– When money will flow in Where money will flow in from How much money will flow in

Finding Necessary Information May be a problem for new businesses Do not have previous financial data Often rely on figures obtained through marketing research Existing businesses have financial information. Review previous profit-and-loss statements. Analyze industry trends and predictions.

Components of a Cash Flow Statement Cash payments Beginning cash balance Money available at the beginning of each month Cash receipts Specific sources of money flowing into the business Total cash receipts All of the sources of income listed under cash receipts Total cash available Cash available to spend each month Sources of cash flowing out of the business Total cash paid out Determined by adding all of a business’s cash payments Ending cash balance Cash a business has left at the end of the month

What This Means Indicates the financial condition of a business Gives a business a good idea of amount of money that will flow in and out Positive cash flow means there is enough money on hand to meet monthly obligations. Negative cash flow means the business will need to obtain additional money to continue operating. Businesses with extra cash are able to invest. Investments lead to growth and expansion. This generates more sales and more cash. Result is a prosperous business that has cash to continue growing.

Steps to managing your cash flow List all of your income for the month. List all of your expenses, even the small ones. Total the amounts on each list. Income should be more than expenses. If not, there are two options: Reduce your expenses. Find a way to bring in more income.

Businesses often use cash flow statements to obtain credit. What if they present information in a way that is legal but not quite ethical? What if they get the loan, but the bank finds out? Bank might not trust the business in the future. May always be concerns about accuracy of financial information Business might have trouble getting other loans. Was it worth it to be less than completely truthful? Was there another way to be ethical and still get the loan?

MarkED Acknowledgments Original Developers Christopher C. Burke, Lynn Malowney, MarkED Version 1.0 Copyright © 2007 MarkED Resource Center

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