Tracking Money Flows2.03

All About the Cash FlowCash Flow- movement of money in and out of the business’ cash accounts.

The cash flow statement monitors how the business uses cash throughout a specific accounting period.

Adequate vs. Inadequate Cash?

Every business has a goal to maintain adequate cash flow. It means that the business is generating enough cash to cover operating costs.

Inadequate cash flow can cause the business to take risky loans, declare bankruptcy, and ultimately close.

Cash Inflows vs. Outflows

Cash Inflows:

Operating ActivitiesInvesting ActivitiesFinancing Activities

Cash Outflows:

SalariesRentInsurance Loan repaymentsUtilitiesCapital expendituresTaxes/Dividends

Why use a Cash Flow Statement?

Frankly, it’d be silly not do.

Businesses need to know what cash is available for inflow/outflow activities. A cash flow statements provides the structure for managers to make sound decisions.

New vs. Established Business- How to estimate?

New Business:

Industry ReportsPro-forma Reports (forecasts)Market AnalysisStart-up costs/funding

Established Business:

Previous ExperienceCurrent Market AnalysisCurrent Cash on Hand (CoH)

Calculating Cash Flow

Earnings before interest & taxes (EBIT)+

Depreciation (loss of value on assets)-

Taxes=

Cash Flow

Sample Cash FlowMany businesses use a year-to-year cash flow statement to understand what is going on in the business. From looking at it, what can you see?

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Understanding the balance sheet2.03pt 2

What’s a Balance Sheet?

A snapshot of the financial position of a company’s assets, liability and equity at a point in time.

Assets- products and property a company owns, cash and items that can be quickly converted into cash

Liabilities- financial obligations the company has

Net Worth- the difference between assets and liabilities

Equity- money or property used to keep the company in a balanced state

Other Terms to Know

Accounts Receivable: Money/Resources owed the business (revenues, cash, interest, etc.)Accounts Payable: Money/resources the business owesShareholder Equity: Total Assets- Total LiabilitiesRetained Earnings: Money used to reinvest in the business

Extras-Par Value: face value of an investment bondCapital surplus: additional equity that’s not considered RE or stockTreasury Stock: stock the business keepsReserves: Cash held on-hand or at a bank

Current Assets

Assets that can be changed into cash under a year:Cash & Cash Equivalents

Accounts ReceivableInventory

Also can be defined as the amount used to cover debts and liabilities without selling fixed assets.

Fixed Assets

Fixed Assets are not easily turned into cash. In most cases, businesses are examined by how much fixed assets it has. More fixed assets, the more successful they are perceived to be.

Includes:LandFacilitiesLarge Equipment

Lenders use these items to decide whether to lend to a business. Therefore, fixed assets are very important to traditional businesses.

Current Liabilities

Current Liabilities are debts or obligations a company owns that typically need to be repaid within a year; usually paid with current assets.

Included:Short-term loansCosts of Goods Sold (CoGS)

Finance Equations

Current Ratio- shows how well-positioned a company is to quickly pay bills, a.k.a. solvency. A ratio over 1 is ideal.

The equation: Current Assets/Current Liabilities

Balance Sheet Equation- Used to check the balance sheet numbersAssets- Liabilities= Equity

Example Balance Sheet

Income Statement

Also referred to as:Profit & Loss StatementStatement of Income & ExpensesStatement of Financial PerformanceEarnings Statement

The goal? To summarize the profit-generating activities that occurred over a particular period of time

Elements of the P&L Statement

Total Revenue: Total amount of sales and cash a business receivesCost of Goods Sold: direct costs associated with the goods/services sold by company

Operating Expenses: costs associated with being in businessDepreciation: Wear and tear of equipment and resourcesAmortization: paying off debts on an installment basis

Goodwill: account used to show money given to community, non-profits, and other causes

Gross Profit: Money left over after CoGs

Net Income/Profit: Money left over after expenses

Example Income Statement

Putting it All Together

Financial Data: Used to give managers, shareholders and investors an idea of how well the business or department is performing.

Types of Financial Reports:Statement of Cash Flows- How well does the business use cash in its operations?Balance Sheet- How solvent the business is; does it own more than it owes?Profit and Loss Statement- How is the business generating revenue?

Goal: Display financial information in a way where managers can make sound business decisions.