Cash Flow – Cash Flow Notes

Sales turnover and net profits may follow a rollercoaster pattern familiar to most business but when the cash flow dries up the game is over. Cash flow management is critical not just to business performance but to business survival in the days and months of a credit crunch. Accounting software can offer many solutions but there is no substitute for astute management to boost cash flow and reduce liquidity risks.

Most businesses will experience periods of lower sales and times when losses may be incurred as expenses exceed sales income. With a sound business the position is recoverable by gaining extra sales growth or reducing expenditure. A business that runs out of cash resources is dead in the water.

Debtors and sales income management

The objective is to obtain payment from customers as fast as possible improving cash flow and minimising the risk of bad debts and not being paid at all.

Payment terms offered to customers should be clearly stated and fixed as standard accounting figures according to the amount of funding the business is prepared to offer its clients. Because that is exactly what credit terms to customers is, free cash funding in exchange for eventual sales income.

Consideration should be given to using a cash discount system to encourage sales invoices to be paid faster. In some businesses it would be appropriate to obtain up front deposits and scheduled payments. Review this practise to obtain a greater proportion of payments faster to improve liquidity.

New customers should be subjected to a strict credit check. All new customers where credit check details are not available should be invoiced by the accounting function on a pro forma basis. Any businesses who fail to meet the highest credit score required should remain on a pro forma invoice basis.

Each business should determine a set of credit control procedures including issuing sales invoices, producing customer statements of outstanding balances and a standard set of credit control letters that actually get the cash in. An essential process in the credit control procedure would be to ensure the accountant or bookkeeper always issues sales invoices and customer statements promptly.

Incorporate into the terms of trade a set of rules to invoke interest payments for late payment and late payment debt recovery costs. In the UK the Late Payment of Commercial Debts (Interest) Act 1998 sets out the statutory rights of business to claim interest and costs.

Consider the possibility of factoring sales invoices due from debtors either by selling the sales invoices to a third party or raising cash on the value of those invoices pending payment. Factoring has the disadvantage of often not being cheap but does have the advantage of generating a regular stream of cash.

Bad debts have a double impact on any business and all possible steps should be taken to reduce the risk. A bad debt not only uses valuable resources in chasing the debt with the negative impact on cash flow and liquidity but also is a straight loss to the net profit and a strong indicator that the accounting function is failing the business.

Creditors and expenditure management

The objective is to extend the time allowed for payment of expenses the business incurs.

Consider the frequency of all payments made to suppliers. Small business often has alternative payment terms available for the payment of taxes. In the UK value added tax can be paid quarterly or monthly, vat cash accounting can ease the tax liability due in critical periods and paye payments can be paid quarterly rather than monthly for smaller businesses.

Consider the frequency which wages and salaries are paid. A sensitive area since it involves the most important people to the business success but adopting a payment period to coincide with the receipt of cash from customers may in some circumstances balance liquidity.

General creditors are a major area to be addressed in terms of both the amount of credit received from suppliers and the time required to pay those creditor accounts. Larger orders on extended payments terms creates a risk area should the goods not be used but can greatly assist cash flow as the business is effectively borrowing free cash from its suppliers.

Stock levels are crucial to financial management of the creditor total. High stock levels use valuable working capital which is offset in part by the level of creditors. Higher levels of stock financed by free credit from creditors lowers the cash flow requirements on the other parts of the business.



By: Terry Cartwright

About the Author:

Keven Chrones

While most businesses can survive for short periods without profit, not being able to pay staff salaries or important suppliers can often signal the end of the company. And all too often, when cashflow slows down or funds dry up, there’s no one to turn to – even though the problem isn’t lack of business.

To make matters worse, the current credit crunch means that in all likelihood your own customers are trying to stretch their payment terms as far as they can, despite the Government’s commitment to ensuring small suppliers are paid as quickly as possible.

Hitachi Capital Invoice Finance have produced a cash flow guide to help businesses ride out the credit crunch and ensure they are financially fit for the New Year.

The seven point guide will help your company to have effective cash flow, so you will be able to beat the recession and ensure you are in brilliant shape to capitalise when the economy picks up.

Cash is the lifeblood of all business and is the key to survival and growth. In these challenging times it’s often used as a key indicator of the health of a business. Many businesses can survive for short periods without profit or sales, but not being able to pay staff salaries or important suppliers can often signal the end of the business.

The downloadable guide includes advice on producing a cash flow forecast, the benefits of using a factoring company, requesting extensions for credit terms and more.

Steve Smith, Divisional Managing Director, Hitachi Capital Invoice Finance said: “The New Year is often a challenging time for businesses. This year it is more important than ever to ensure that companies are fit and ready to face the challenges that this year will throw at them. Our simple guide is designed to take the hassle out of cash flow, so people can spend time on more productive issues.

To download your cash flow guide visit http://www.hitachicapital.co.uk/invoicefinance



By: Nick Williams

About the Author:

Jonah Grant

You aren’t the only one with circles under your eyes, staying up nights worrying about how the economy is endangering your lifestyle and standard of living.

Millions of North Americans are wondering just how they will meet life’s goals — like owning a nice home, sending their kids to college, or even affording retirement. Some are even losing sleep over it, as well they should.

You probably know people — maybe even yourself — who have seen their retirement savings drop out of site in the volatile stock market. Or maybe the business you’ve spent much of your life building is suddenly struggling just to stay open.

Or maybe you’re wanting to start your own business and KNOW you have a winning idea, but you don’t have the cash to begin and no one wants to loan you the money.

Fear not! The Cash Flow Industry is coming to the rescue. Financial professionals like myself broker notes. That means we buy financial notes you hold and give you a lump sum of CASH.

For example, when you sold your home, you financed the loan for the buyer. Now the buyer is making payments to you. But frankly you would love to have ALL your money RIGHT NOW — and not have to wait 10, 20, or 30 years to get it all.

Another common scenario is your spouse was in a bad traffic accident. The good news it wasn’t your fault. The court ordered the other person to pay for your wrecked car and medical costs. Typically that money is spread out over years in monthly payments.

Our firm steps in, buys the note from you, and gives YOU all your money in one BIG lump sun. That’s cash you can use NOW to buy a new car and pay off medical bills. Suddenly, cash flow is no longer a problem.

As banks have walked away from the credit market, making loans harder and harder to get, a rapidly growing number of individuals and businesses are turning to the Cash Flow Industry for the money they need so badly.

Just to give you an idea of the possibilities, I often purchase mortgage notes, owner-financed mortgages, commercial notes, structured settlements, lottery payments, annuities, and court settlements.

These are frequently very valuable assets you posses that simply aren’t bringing you much money RIGHT NOW when you need it most. Rather than having to see your money trickle in over a long period of time, you get your lump cash payment all at once — right now!

Rather than wait for your business to falter, or your child to have to put off college, or delay retirement for another 5 years, you can have the money you need immediately.

Many of the businesses and individuals I talk to say having their money NOW is far more valuable than sitting on an asset that yields income only very slow.

For many, these are troubling times when a good dose of cash flow NOW can not only ensure survival, but enable your goals and dreams to become reality.



By: Sophia Rowe

About the Author:

Thaddeus Manoi

Cash flow is the money that comes in and out of your business and it is considered to be its lifeblood. According to a study from the US Bank, 82% of business failures result from poor cash flow management skills. Therefore, preparing monthly cash flow statements might help your business to avoid running out of money. Keep in mind that your business’ profits are not necessarily equivalent to your cash ins and outs.

A basic cash flow statement has five sections:

1. Beginning Cash Balance: This section includes the cash available both in the bank and at hand at the beginning of the month. If you have $800 in your checking account and $400 in cash, your beginning cash balance is $1200.

2. Cash In: Includes all the activities that bring cash to your business, such as cash from sales and receivables (cash payments for old debts). If you earned $1000 in cash from sales and $400 from people who paid their old debts, your total “Cash In” is $1400.

3. Cash Out: Lists all the expenses that take cash out of your business. Items commonly listed under this section include cash used to pay rent, salaries, supplies, loans, and taxes. If you paid $700 for rent, $200 for supplies, and $1000 for salaries, your “Cash Out” totals $1900.

4. Net Change: Determined by subtracting the total “Cash Out” (the 3rd section) from the total “Cash In” (the 2nd section). In our example, your net change is: $1400 – $1900 = -$500. Keep in mind that a positive cash flow enables your business to keep growing.

5. Ending Cash Balance: Calculated by adding the “Net Change” (section #4) and the “Beginning Cash Balance” (section #1). The “Ending Cash Balance” becomes the “Beginning Cash Balance” section of the next period.

Tip: A negative “Net Change” means that you spent more than what you earned. If this is the case, you should reduce some expenses to ensure that you do not deplete your business’ cash reserves. Check out our next article to learn more about correcting a negative “Net Change”.



By: ACCION USA Staff

About the Author:

Fermin Goldsworthy

Structured settlements are offered for a variety of reasons. It is possible for recipients of a structured settlement to trade them for cash flow so as to meet any immediate liquidity requirements such as debts or medical expenses.

An analysis of one’s needs with the help of financial experts usually provides insight into the amount of cash flow necessary. The cash flow for a structured settlement depends upon various factors such as the total settlement amount and the financial rating of the insurance company. Also, buyers may have terms and conditions that restrict certain categories of structured settlement beneficiaries, such as minors, from selling the settlements for a lump sum.

Future structured settlements can be sold for lump sum payments without tax liabilities to either the buyer or the seller. Financial institutions that buy structured settlements in return for cash flow can be found on the internet. These companies offer free quotes that are useful in comparing the net lump sum. Information required to obtain free quotes includes the name of the insurance company, state of residence, and the amount of structured settlement. One should also go through the FAQ section of these sites and get an idea of the issues commonly faced by those who wish for a cash flow in exchange of a structured settlement. Settlement companies offer various plans. One should look for a plan that offers the best value for the sale of structured settlement.

Documents required for negotiating the contract include copies of the settlement and the policy. Before the contract is signed, the buyer sends a disclosure statement to the seller which mentions the lump sum and the deductibles. The seller can avail the cash flow only after a court approves the sale of the structured settlement and considers the sale to be in the best interests of the seller and his dependents. The entire process including the court hearing can take up to sixty days.

One should check the credentials of the buyer with respect to his payment records, fair-dealing, and relationship with the insurance companies. The last mentioned is very important as buyers with smooth working relationship with the insurance companies can help one to get cash quickly. Of course, the bottom line is the cash flow offered in exchange of the structured settlements. This depends on the rate of interests charged by the various buyers.



By: Frank Dotson

About the Author:

Tommy Meyer

The word budget can strike fear into even the strongest of people. If there is one thing very few people are ready for when they leave the safety of home for the first time it is dealing with money. There are not too many people who even know how to balance their checkbook after they open their first checking account. So creating a budget can be a scary proposition for anyone who isn’t good at keeping track of their money.

But if we look at a budget in a different light then maybe it will be easier to live with what it is. And all it is is a cash flow plan. All a budget does is track where the money is flowing from and where it is flowing to. Cash flow; it’s what makes the world go around.

Here are 7 steps you can use to plan your cash flow and before you know it you’ll have built a budget. Start with a piece of paper and a pencil; you can save those fancy budgeting software packages for later.

1. Write down your monthly income. If you are a salaried worker this should be easy. If your income is not that steady then add up the past three months worth of income and average it by dividing by three. This will give you a good starting point.

2. Start writing down all your monthly expenses. Mortgage, rent, car payment, credit card payments, utilities, groceries, eating out, entertainment, and anything else you spend money on. For those expenses that fluctuate, such as groceries and gas, use the three month average method to get an accurate amount.

3. Here’s the scary part for most people. Subtract the expenses from the income and see what’s left. You will either have a positive cash flow or negative cash flow. Unfortunately in this day of increasing debt most people have a negative cash flow.

4. Once you have your monthly cash flow laid out in front of you you can start assigning your money to your expenses. As you make those payments throughout the month write them down to see how your spending lines up with what you have budgeted for that particular item.

5. If you have a negative cash flow then you can start looking at everything you have written down and find areas where your spending may not be in the best interest of you financial goals. As you do this you can free up money for more important financial considerations.

6. The first time you do a cash flow plan it probably won’t work out quite right. It normally takes about three months to get everything working right while you figure out where your money has been going every month. Be patient with your budget and before long it will start working and you will regain control of your money.

7. Once you are comfortable with your written budget and you have better control of where your money goes and what it does then consider investing in some budget software such as Quicken. It can make your cash flow plan much easier and with the added features like retirement and tax planning it can give you a solid financial future.

By using these 7 cash flow steps you can begin your budget quickly and easily. Only by taking back control of your money can you improve your financial future for you and your family.



By: Andrew Bicknell

About the Author:

Rhonda Leopard

Previous studies have shown that stock prices are moved primarily by news about discount rates (expected returns). Applying Campbell’s (1991) variance decomposition framework to financially distressed firms supports this argument.

The central focus of the business plan must be the Cash flow Projections for your business. These cash flow projections will indicate to the banker the cash that you expect to flow into and out of your business during the start-up months and years.

The conventional valuation model used in Campbell’s (1991) framework suggests that stock prices reflect an infinite series of discounted expected cash flows. Hence, unexpected stock returns of a typical firm are driven by changes in expectations of cash flows and discount rates for all future periods. When a firm faces severe financial distress, however, the value of its stock is strongly driven by the likelihood that the firm will go bankrupt. Since this likelihood is directly affected by the ability of the firm to generate cash in the near future, any news about the firm’s cash flows should have a strong impact on its current stock price. Put differently, it is more likely that a firm will go bankrupt due to a decrease in its expected cash flows, rather than an increase in its discount rate.

This argument can be strengthened by taking into account the time series properties of cash-flow and expected-return news. As Campbell (1991) notes, expected-return news is dominant since changes in expected returns are more persistent than changes in expected cash flows. Hence, for firms with short life expectancies, such as financially distressed firms, persistence has less of an effect, implying a weaker (stronger) impact of news about future returns (cash flows) on current firm value.

The young start-up entrepreneur faces many difficult situations along the way to starting a new business. For example, what is the potential size of the market for the product or service? How is the product or service priced? Has a cash flow analysis been done so that the break-even point is determined? What is the break-even point? Will there be sufficient funds flowing into the bank .

The results show that the values of financially distressed firms are less sensitive to volatility shocks. This finding is consistent with the prediction that cash-flow news (relative to expected-return news) is more important for firms in financial distress than for healthy firms.

Cash flow is the life blood of any start up business. If your fledgling business does not have enough cash flow to get it through the first months of business then surely it will fail before it really has time to grow. Therefore it is very important to ensure that when setting your business plan you need to calculate and fund these costs. A large group of new businesses fail because of this and yet if they were to ensure cash flow in the start up phase then they might still be around today. So ensure cash flow is made a priority for your business.



By: Gav Shannon

About the Author:

Carlota Wommack

The Cash Flow Statement is made up of three sections. The first section is operating activities. Operating activities include your company’s profit or loss and non-cash items that affect your profit without affecting cash. Examples of these types of non-cash expenses are depreciation and bad-debt expense. Also included in this section are changes to your operating assets and liabilities. Operating assets and liabilities include accounts receivable, prepaid expenses, accounts payable and accrued liabilities. A common feature of operating assets and liabilities is these items have been reflected in the Profit & Loss Statement in a period different from the period in which they were paid.

The second section of the Cash Flow Statement is investing activities. Investing activities are items such as property and equipment or loans receivables. An interesting aspect of investing activities assets is that they, unlike operating assets, generally do not affect the company’s profit. In other words, investing assets do not represent revenue or expense items.

The third and final section of the Cash Flow Statement is financing activities. Financing activities are debt and equity items. If you increase or decrease your debt, that change is included in financing activities. Equity changes such a capital contributions or shareholder distributions also are reflected under financing activities. Like investing activities assets, financing activities liabilities and equity do not represent revenue or expense items.

The sum of the three sections: Operating activities, investing activities and financing activities is your cash flow for the period being reported. A positive number indicates an increase in cash and decrease indicates a decrease in cash. Now it’s time to take a closer look at the Cash Flow Statement and see why your cash flow is different from your profit.

Compare your cash flow to your profit. If your cash flow is higher than your profit, you are either liquidating assets or increasing your debt, which is negative for your business. On the other hand, it could be that you are increasing your capital, which is a positive for your business.

If your cash flow is less than your profit, you are increasing your assets, such as purchasing property and equipment for future growth or paying down your debt. These are both positives for your business. But it could mean that your money is being tied up in accounts receivable because collections have deteriorated and your business is weakening. Or it could be that you are decreasing your capital, which is a negative for your business.

Cash flow is an indicator of where you are spending your money and the future strength of your business. Small business owners generally do not realize the importance of comparing their past years Cash Flow Statements to measure their business growth. Some of them are ignorant of the basic rules that one should follow to compare their past Cash Flow Statement with the current one. So now that you are aware of these formulas take a few minutes and review your Cash Flow Statement. Compare it with last year and see how your business is progressing. You will be surprised at how much valuable information is contained in your Cash Flow Statement.



By: Linda Dawson

About the Author:

Yee Hodnefield

In the normal course of business, cash comes in as income and goes out as expense. This flow of receiving and spending cash for commercial purposes is known as the cash flow. Since the core objective of any business is to generate profit, the flow of cash is important as it directly affects the bottomline of the company.

Uses Of Cash Flow

Cash flow is used:

to evaluate the liquidity of a company

to find out ratios like the net present value and the internal rate of return

to act as a validating input for net income created by accrual accounting methods

Types Of Cash Flow

Cash flow can be:

operational cash flow (the flow of cash for normal operation of the business)

financing cash flow (the flow of cash for financial activities like loans, dividends, stocks, etc.)

investment cash flow (the flow of cash for investments like plant & machinery, land, and other long term capital expenditures)

Cash flow Constrictions

Cashflow can become constricted due to the extension of the credit period of your invoices by your customers. The more your sales increase and/or the more the credit period increases, the more constricted your cashflow becomes. The effect of cashflow clogging is seen sharply in operational cash flow. Until the cash from the previous and present sales rolls in, inventory cannot be purchased, orders cannot be executed, and business almost comes to a standstill.

Cash flow Funding

To solve this most common commercial problem, finance companies offer solutions to provide your business with a steady source of funds that increases in direct proportion with your sales. The finance offered by the finance companies to improve the cash flow is known as cash flow funding, which is typically in the form of account receivables funding or export receivables finance or purchase order finance.

Account Receivables Funding

Account receivables funding is also known as invoices funding or factoring. Here, approximately 85% of the value of your invoices is paid immediately, with the remaining 15% less the fees of the finance company paid to you when your customer honors your invoice.

Export Receivables Finance

To expand your overseas business profitably, some finance companies offer to pay almost 80% of your export receivables. The remaining 20% minus the fees of the finance company is paid to you after your overseas buyer pays your receivables. This enhances your cashflow during the work-in-progress and shipping stages. Moreover, the chasing and collection of the receivables may be done by the finance company as they have a multilingual staff, which is extremely well-trained in the laws, customs, and procedures of different countries.

Purchase Order Finance

Here, funds are provided against your purchase orders. The finance company can directly pay to your suppliers in cash, thereby availing huge cash discounts for your business. It can also provide letters of credit and supplier guarantees. This facilitates the smooth execution of your purchase order.



By: Amelie Mag

About the Author:

Alejandro

cash flow loan provide right financial assistance to businessmen who require funds to meet up financial obligations of their business. With cash flow loans you can easily attain balanced cash flow which helps your business flourish.

A borrower can choose from two options i.e. secured and unsecured. For secured cash flow loans you need to pledge your valuable asset as security. The loan amount offered as secured ranges from £5000-£25000 and is issued for a term of 1-10 years. Secured loans are offer at lower rates and can be easily availed by any borrower.

The unsecured cash flow loans don’t demand any security and extend a smaller an amount maximum up to £15000. The repayment term varies from 3-7 years. Due to absence of collateral they are provided at slightly higher interest rate.

Cash flow loans can be taken to for meeting various business obligations:-

•    To start up new business

•    Invest in new venture ( large or small)

•    Asset purchase

•    Buying tools and equipments

•    Paying off wages and salaries

•    Purchasing raw material

Before the approval you need to present the cash flow statement to your creditor. The loan amount to be offered is decided after analyzing your cash flow statement. The cash flow statement represents the cash amount left after making tax, depreciation and other such deductions.

Those suffering from bad credit like CCJs, IVA, arrears, defaults, late payments and bankruptcy can apply for cash flow loans without any problem. Your bad credit or poor scores is not a problem.

Cash flow loans can be applied through banks, other financial institution and online as well. Applying online is simple and easy. You just have to fill a simple application form with few personal details.



By: Angela Alderton

About the Author:

Roman Merrion