Cash flow sounds like a relatively simple concept, and in some ways it is, but poor cash flow management can take down a small business. Cash flow is equally critical for households. If you miss a paycheck when bills come due and you have no reserve funds available, you will incur losses in terms of late payment fees and other potential penalties.
How do you manage cash flow? First, you have to track it properly. Businesses do so with a cash flow statement (CFS) and homes by means of a household budget.
For businesses, a CFS covers the flow of cash in and out over a particular period of time. Start with net earnings, which is the cash from revenue minus expenses (cost of goods sold, taxes, etc.). From there, adjustments are made based on other flows of cash in and out from operations, investing activities, and financing activities.
Examples of adjustments include the following:
Sum up all the positive and negative flows, and that captures the cash flow for your business.
With a home, cash flow is captured within a budget. Generally, budgets are weekly or monthly, but they must take into account annual expenses like insurance payments or annual renewal subscriptions. Lay out all of your revenue (salary, etc.) and your expenses (monthly bills, etc.), and add contingency cash for unexpected expenses like auto repair.
Home cash flow does not usually cover depreciation and investing in an accounting sense, but it does in a budgeting sense. If you know that you have to replace your car in a particular year, it must end up as an item to consider in that year's expense budget.
In both home and business applications of cash flow, proper tracking is a must. Timing and anticipation of revenue and expenses then takes priority. Monitor your home cash flow and treat it as an accountant would. If you cannot account for all of your incoming cash, at least you know that you have a problem.
Typically, this leads to a realization that the little things like buying a few extra coffees, eating out more often, and daily snacks add up and take a toll on your cash flow. What you do with that cash flow analysis is up to you.
Originally Posted at: https://www.moneytips.com/cash-flow-101
Information contained on this page is provided by an independent third-party content provider. Frankly and this Site make no warranties or representations in connection therewith. If you are affiliated with this page and would like it removed please contact email@example.com