The Beginner’s Guide To Cash Flow - Intuit

The beginner’sguide to cash flowBy Kathryn Pomroy

ContentsIntroduction3Why is cash flow important to your business?4What is a cash flow statement?5What goes into your cash flow statement6Cash inflows and outflows on your cash flow statement7The difference between cash flow and profit8Cash basis accounting9Accrual accounting10How to read a cash flow statement11What causes cash flow problems?13Cash flow you can bank on142

IntroductionThink of cash flow like your car’s gas tank. You fill upthe tank with gas, and it empties as you drive. The goal,however, is to always have enough gas in your tank soyou never run on empty. In the same way, cash flow is themovement of cash in and out of your business and yourbank account. Cash inflows are your sources of income,and cash outflows are your business expenses. Naturally,positive cash flow is better than negative cash flow.3

Why is cash flowimportant to yourbusiness?For small business owners, positive cash flow is the goal. Youwant to generate more money than you’re spending. Thissounds simple, but plenty of profitable businesses run intocash flow problems. It can be challenging to balance regularbusiness expenses — like salaries, rent, and technologyupdates — with the sporadic revenue and periods ofnegative cash flow that can come from seasonal patterns orinvestments in growth.Achieving and maintaining positive cash flow is essential ina small business. In practical terms, understanding whereyour cash goes every month and how you can get morecash when you need it are the bare necessities to running asuccessful company.To grasp the idea of cash flow, let’s take a look at a cashflow statement, how to read it, why it’s important, and whatproblems to avoid so you don’t find yourself and yourbusiness in a tight spot.4

What is a cash flowstatement?A cash flow statement — also known as a statement of cashflows — tracks money in and money out of your company. Itwill show how much cash a company has on hand and provideinsight into a company’s liquidity. Public companies arerequired to release cash flow statements each quarter. You cansee examples of cash flow statements from Nordstrom, MetaFinancial Group, Inc., and Ford on Yahoo! Finance.A better option for your company may be to download yourfree cash flow statement template from QuickBooks.Download your professional cash flowstatement template for free.Get Template5

What goes into your cashflow statementCash flow statements, along with balance sheets and incomestatements help provide insights into a company’s finances. Butbusiness owners aren’t always sure how they interconnect.The balance sheet gives you an overall view of a company’sfinances. It’s split into assets, liabilities, and equity. The cashbalance from a company’s cash flow statement appears on thebalance sheet in the asset section.The income statement shows a company’s revenue, expenses,and profit and losses (P&L). It will offer insights into a company’sprofitability. The bottom line of your income statement isnet income. Net income is used to calculate cash flow fromoperating your business. Also, any non-cash income from theincome statement, such as depreciation, and non-cash expensesflow into the cash flow statement and affect net income.Long story short, each accounting statement is important forProfits and cash flow are both essential aspectsunderstanding your company’s performance from all angles. Theof a business. After all, for your business to bebalance sheet and cash flow statement focus on the financialprosperous long term, you need to make amanagement of your company in terms of both structure andprofit while also operating with positive cashassets. Whereas, the income statement shows you which coreflow. Keep in mind, however, that profit andoperating activities generate the most income for your company.cash flow are very different.6

Cash inflows andoutflows on your cashflow statementNot understanding cash flow and poor cash flow managementare among the leading reasons why businesses fail. That’s whyunderstanding the cash inflows and outflows on your cash flowstatement is so important if you want to keep your business upand running.Cash inflow is the money going into your company. It may befrom investments and financing or from sales. Cash inflow isthe opposite of cash outflow, which is money going out of yourbusiness from things like payments to vendor or disbursements.For your company to be considered healthy, your cash inflowmust be greater than your cash outflow.On your cash flow statement, you will find operating activity,investing activity, and financing activity, in that order. Addtogether the total cash gained from or used by each of the threeactivities to come up with the overall change in cash for theperiod. Then add this to the opening cash balance to reach yourcash flow statement’s bottom line, also known as the closingcash balance.7

The difference betweencash flow and profitAlthough cash flow and profit are related, they’re quite differentwhen it comes to accounting. You can see it most clearly whenyou compare an income statement to a cash flow statement.The most significant difference between the two is that theincome statement may be based on accrual accounting, whereasthe cash flow statement is based on cash basis accounting.But, even if you don’t handle your own financial reporting, it’sstill important to know how both accrual accounting and cashbasis accounting work so you can choose the best reportingmethod for your business. It’s also important to know that aslong as your sales are less than 25 million per year, you’re freeto use either.8

Cash basis accountingCash basis accounting identifies revenue when it’s receivedand expenses when they’re paid. It does not recognize eitheraccounts receivables or accounts payables. Many smallbusinesses use cash basis accounting because it’s simpler tomaintain. It’s easy to see when a transaction has been made orhow much cash your business actually has at any given time bylooking at your bank balance.9

Accrual accountingAccrual accounting, on the other hand,records revenues and expenses when theyare earned, irrespective of when the money isreceived or paid out.For example, if you paid 240 up front for atwo-year newspaper subscription, your cashflow statement will show a cash outflow of 240 immediately. On the other hand, yourincome statement will break down the 240into each individual accounting period,usually monthly or quarterly.Think of it this way. Let’s say you started aYou may have had the best intentions but failed to makecompany. After one year, you ran into cashpayment deadlines simply because you couldn’t manageflow issues even though your business wasyour company’s cash outflow or cash inflow. The relationshipprofitable. As a small business, you relied onbetween cash flow and profit will vary depending on theinvoices to collect accounts receivables fromtype of business. You can be profitable but have times ofcustomers. As anyone who sends invoicesslow or inconsistent cash flow.knows, customers don’t always pay on time.Even though your company was profitable,according to your income statement, youwere short on cash.In other words, cash flow is the total amount of moneymoving in and out of a business at a given time. Whereasprofit is the amount of money left over after all expenses aresubtracted or paid.10

How to read a cash flowstatementYou can break down a cash flow statement intoa simple ancingactivitiescash onhand11

The elements of the cash flow equation are:Operating activitiesInvestment activitiesFinancing activitiesAlso called operating cash flow,Also called cash flow from investingFinancing is cash received from oroperating costs show how much you’veactivities, asset investments showpaid to lenders, other creditors, andspent or made on a daily basis. It’s thecash used to buy or sell long-terminvestors (if you have them). Foramount of money your company bringscapital assets for your business. Thesepublicly-traded companies, this isin from any ongoing regular businessassets may be equipment, property,where cash flow from the sale of stocksactivities, such as selling products,machinery, vehicles, furnishings, orand bonds, payment of dividends, ormanufacturing, or providing a service.investment securities. Over time, yourepayment of debt capital is reported.It is the most accurate assessment ofwant to see that your business canhow much money you’ve generatedpay for these investments with incomefrom your core business.generated from its operations.This cash flow equation will show you the changes in cash balancesfrom one period to the next so that you can always stay on top ofyour company’s cash flow.12

What causes cash flowproblems?Plenty of businesses have folded because they didn’tunderstand the difference between making money andmanaging cash flow. More often than not, cash flow is achallenge because income is sporadic while expenses arerecurring. Although both affect your cash flow, sales aren’t acash flow problem — that’s a sales or product problem.A cash flow problem is when sales are good, but cash is stuckin inventory or accounts receivable, so it’s not there when youhave to pay for inventory on-hand or rent. The cash is coming,it’s just not in the bank yet.Controlling your accounts receivable is one of the best waysto increase cash flow. And there are plenty of ways to getpaid faster. Even so, it’s not always easy. Tracking down latepayments can cost you time and money that you might notbe able to spare.Obviously, the best way to stop mounting past duereceivables is to not let them pile up in the first place. But,even that isn’t always possible. Some companies look atbusiness financing options to relieve some of their cash flowburden. That too isn’t always a silver bullet.13

Cash flow you canbank onSolving your company’s cash flow issues typicallycomes down to getting all of your accounting in order.Now you understand the importance of your cash flowstatement and know what cash flow problems to addressin the short-term. You’re ready to look at your accountsreceivables and review your company’s financialstatement.We hope you’ve decided on no more Excel spreadsheetsand no more manual reports. That’s because you nowknow that positive cash flow is part of a comprehensiveaccounting process that can be automated andaccessible.Nearly every business that graduates from Excel toaccounting software like QuickBooks wishes they’ddone it sooner. If you want to stay on top of yourcompany’s cash flow, get your system in place beforeproblems arise. Your employees, your vendors, and youraccountant will thank you.14

A cash flow statement — also known as a statement of cash flows — tracks money in and money out of your company. It . free cash flow statement template from QuickBooks. Download your professional cash flow statement template for free. . Nearly every business that graduates from Excel