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Post: Importance of Cash Flow

Cash flow provides the consistency to pay expenses, invest in new opportunities and grow the business. Cash flow is the primary indicator to measure financial health of the company. Cash flow consists of cash inflow and cash outflow where cash inflow is amount of money coming in company from sales and cash outflow is amount of money being paid as payroll, utilities bills, vendor monthly bills, etc.

Difference between cash generation and profit & loss

Cash flow is defined based on the inflows and outflows of cash for an individual company whereas profits and loss of the company are defined as revenue less expenses. As earning of the revenue does not always increase cash immediately and similarly an expense does not always decrease cash immediately.

Managing Cash Flow

Cash flow management needs to be studied strategically and applied to its very best based on the company's requirement. Some of the key factors to be considered for Cash flow management.

Pay bills strategically Business bills must be payed strategically otherwise if company starts to pay all business bills at same time that will drain all the cash and potentially jeopardize company's relationships with suppliers if unable to pay (Mishriki 2018).

Choose the right payroll cycle Structuring the payroll is the most critical factor for the revenue system of the company. Company should utilize the benefit of holding the cash and running payrolls less frequently than weekly (Mishriki 2018).

Example: My current employer has consultancy business in which vendors provides the funds monthly and just to have strong cash potential available all the time they run the employee payroll on every 15th of the month. As there are rents, utility bills which can't be delayed and needs to be payed always on time.

Applications of Concepts

Sales forecast is a prediction of the sales activity during a given period, based on external and/or internal data. Best Buy which is one of top retailer across US does use sales forecast to assign amount of money to be spent over next year based on last year sales. Every start of the year bestbuy start financial planning which includes how much they can spend on IT infrastructure, R&D of new initiative, renovation of stores, etc. and all these planning happen by using sales forecasting as explained in the chapter that sales forecast is the key input for financial planning.

Reference: Dave Clark, (2014) What is cash flow and why it is so important?

Michael Schmidt, (2018). Cash flow statements: Reviewing Cash Flow from Operations.

Mishriki, J. (2018). Eight tips for small business cash flow management. San Diego Business Journal, 39(25), 6.