Cash Flow - introduction
Cash Flow is without a doubt the King of business activities. It is surprising how many companies are particularly interested in Profit, but little attention devoted to Cash Flow.
And it's particularly well set up the Cash Flow, that allows to the company well thrive and ultimately reach a profit.
There is a saying:
Profit = vanity Cash Flow = health.
No doubt is both necessary, but in the short term, that often decides the existence, or non-existence of the company, is Cash Flow by most important parameter. Keep running business or production activities and also enable the entrance of the company into new activities and intentions.
And why is Cash Flow the key indicator of the performance of the company, and no profit or loss from the profit and loss account statements, or assets or equity capital shown in the balance sheet? It is simple. Profit and loss account and the balance sheet contain all possible assumptions and estimates (about closer here too). The money are different. Either you have it or you do not have them.
Why is Cash Flow vital for business?
Many times we see, that SME (Small and Medium-sized Enterprises) has aspiration to rapidly grow. Until now it is OK. In the beginning of the business has a new company usually few customers, and every new customer (or one bigger order) represents a large percentage of increases in turnover and sales. And every great increase in sales usually denote a big increase of materials, goods, wages and other costs, associated with the this business.
What is the key to realize at this point is, that all by this way raised these expenses usually should be paid before the customer send the payment and most importantly, sooner, than the money effectively inflow to the company account (assuming that you're selling to an invoice).
You must therefore find forward resources – cash to be able such costs forward to pay. If you do not find it the company eventually becomes illiquid and heading towards ruin.
Many business owners looking at its business mainly from the profitability perspectives. And the profit is, of course, the main objective of the business. But paradoxically, if the company should be profitable, it must survive. And just enough cash or access to another resource (including foreign) is essential keep the company alive from the long period perspectives and in the end, reach the profit.
Small and medium-sized enterprises especially in the initial phase of its existence have access to foreign sources very restricted. Banks do not lend to such bodies too like, if are not persuaded that the company can properly dispose of resources. Well master planning Cash Flow in this case is of vital importance for the firm.