BUSINESS TIPS - What is Cash Flow?

BUSINESS TIPS – What is Cash Flow


By Nikki Viljoen – Viljoen Consulting CC November 2009

We all hear the words every day – “Cash is King”! Clearly it is preferable to have physical cash in your hand, than say a cheque or even money in the bank. Why do you think that that is?

Firstly if the money is in the bank, then there may be expenses that still need to go off your account, you would still need to go to the bank to draw money or alternatively you may not have the card or the correct access codes to get the money out of the bank. So having physical cash in your hand is always a good thing.

Let’s have a look at what cash flow is – exactly. Quite simply, it is the physical money that you have access to at any given time. It’s not the money that you are waiting to be paid. It’s not the stock that you are waiting to sell – it’s the physical cash that you have access to at any given time.

Having a good cash flow is absolutely imperative. As SMME’s (Small, Micro, Medium Enterprises) we need a good cash flow in order to purchase our supplies, to pay rent, to pay our staff and to pay our way in the every day manner in which we conduct our business. In short it is that lifeblood that we need in order to earn our livelihood, without it we would whither up and literally die.

So how do we get this ‘cash flow’?

First of all we need to get money into the business – this is usually referred to as a “cash inflow” and it is usually made of up four different components, these are:
· Sales of our products and/or services – well that’s pretty self explanatory.
· Loan or credit card proceeds – this is either money that we have loaned from a bank or financial institution or indeed money that we have loaned our business in our personal capacity and/or money that is coming to us from sales that were paid for by means of credit cards or indeed money that we have ‘borrowed’ on our credit cards, even money that is owed to us by our debtors.
· Asset Sales – this would be when we sell assets (such as old computers or vehicles etc) that were previously purchased by the company that we are now upgrading and/or even just getting rid of.
· Owner investments – these would be property and/or financial and/or business investments that we have made on behalf of our company.

Then of course money goes out of the business – this is usually referred to as “cash outflow” and again it is usually made up of four different components, these are:
· Business expenditures – these are of course the expenses that are raised in the normal day to day running of the business. This would also include salaries and wages etc for the staff.
· Loan or credit card principal payments – just as you got the money either from a loan or your credit card, now you have to pay that loan back or pay your credit card back.
· Asset purchases – again, just as you sold old equipment or equipment that you no longer needed, so now you have to buy new equipment and/or assets for the business.
· Owner withdrawals – again that is pretty self explanatory and it is when the owner takes money out of the business for personal use. These drawings are usually offset against the money that the owner has lent to the business out of his/her loan account.

Both the ‘Cash Inflows’ and the ‘Cash Outflows’ also fit into three main categories within the business and these are:
· Operating – this covers the sales of product and/or services of your business, together with the business expenses that you incur in the selling of your product and/or service.
· Investing – this would be all the assets that you buy and sell and
· Financing – this obviously covers all the loans and the repayments of the loans as well as the money that the owner has invested into his/her business and the withdrawals that he/she makes for personal use.

So there you have it, basically what cash flow is and the ‘how’ and ‘what’ it relates to.

Next week we will have a look at some simple tips on how to manage your cash flow.

Nikki is an Internal Auditor and Business Administration Specialist who can be contacted on 083 702 8849 or nikki@viljoenconsulting.co.za or http://www.viljoenconsulting.co.za