By Arlene E. Liberal
Cash is said to be the life-blood of business A human being who bleeds or loses blood from an injury is in danger of dying if the bleeding is not stopped. In a similar manner, the life of the firm is in danger if it runs out of cash to finance its daily operation. A normal adult person who is idle and unproductive, is not useful to himself, his family and society. Similarly, too much unutilized cash is not good for the enterprise, as idle money does not earn income for the enterprise. Sound financial management is needed to achieve the balance of having enough cash to make the firm’s operation viable and profitable.
Experts in financial management have developed a tool called Cash Flow Statement and from which one can draw an analysis to determine the status or cash position of the firm. The Cash Flow concept is quite simple. One simply determines how much cash inflows is received by the firm, then also determine how much cash goes out (cash outflow) from the firm for a given period. The difference between Cash Inflow and Cash Outflow is the Ending Balance for that period. If Ending Balance shows positive cash balance, then it is good because that amount can be used for the next period’s operation. If the Ending Balance is negative which shows that there were more cash expenses than cash revenues, then it will inform management to do something in order to cover the deficit.
While the concept of Cash Flow is simple, the process of preparing the Cash Flow Statement is not that simple as it requires adequate and up-to-date financial records from which figures can be taken. The Cash Flow Statement shows the sources and uses of cash. Cash inflows includes cash receipts from sales, collections from accounts receivables, inflows from borrowed money or loans, cash inflows from investors and inflows from other incomes. Cash Outflows, on the other hand, includes cash expenses from operation such as payment for purchases of materials and supplies, payments for salaries, cash payments to acquire assets, payments for accounts on credit or loans, taxes and other cash expenses.
Financial managers use the Cash Flow Statement to make projections so that they can anticipate the cash requirement of the firm over a given period such as one year (or longer or shorter depending on the requirements of the firm). To make the projection, the financial manager has to make assumptions. The assumptions must be as realistic as possible to make the statement useful and these assumptions must be written down so references can be made for reality check.
What happens if the Cash Flow Statement Projection shows that the firm has generated extra cash not needed for its operation? Then it can decide to invest the extra cash elsewhere so it can generate additional income for the firm. On the other hand, if it finds out that the firm will have cash deficit for a particular period, then it can do something about it such as: 1) exert effort to increase sales; or exert effort to reduce costs; or borrow money to cover the deficit or encourage owners and investors to bring in additional cash for that period.
Summary:
One of the major tasks of an entrepreneur is to make sure that cash is available for the firm’s operation and that it is used for the best interest of the firm. This requires adequate, accurate, and up-to-date records and reports and the information gathered must be used for analysis of the firm’s status and timely decision is made to make the firm sustainable and profitable.
Sample of a Cash Flow Statement Projection of a Micro Enterprise Producing Pastillas Candy:*
|
Particulars |
Pre-Operating |
Jan |
Feb |
Mar |
April |
|
Cash Balance( beginning) |
– |
18,000 |
24.065 |
32,129 |
40,563 |
|
|
|
|
|
|
|
|
Cash Provided by ( or Cash Inflow) |
|
|
|
|
|
|
Equity ((Owner’s) Contribution |
88,100 |
|
|
|
|
|
Cash Sales |
|
2,700 |
2,700 |
2,900 |
3,500 |
|
Accounts Receivable Collection |
|
18,000 |
24,000 |
25,800 |
30,000 |
|
Total Cash Provided |
88,100 |
38,800 |
50,675 |
60,829 |
74.063 |
|
|
|
|
|
|
|
|
Cash Applied To (or Cash Outflow) |
|
|
|
|
|
|
Kitchen Utensils |
5,300 |
|
|
|
|
|
Furniture and Fixtures |
27,500 |
|
|
|
|
|
Office Equipment |
3,000 |
|
|
|
|
|
Permits and Licenses |
900 |
|
|
|
|
|
Refundable deposits |
2,000 |
|
|
|
|
|
Building Improvements |
24,000 |
|
|
|
|
|
Purchases of ingredients |
3,400 |
6,700 |
7,400 |
8,200 |
9,600 |
|
Packaging Materials |
1,900 |
3,200 |
3,200 |
3,400 |
4,000 |
|
LPG |
1,000 |
|
|
|
|
|
Office Supplies |
1,000 |
|
|
500 |
500 |
|
Marketing Expenses |
|
1,335 |
1,335 |
1,465 |
1,735 |
|
Telephone |
|
500 |
500 |
500 |
500 |
|
Salaries |
|
3,000 |
3,000 |
3,000 |
3,000 |
|
Power and water |
|
|
800 |
800 |
800 |
|
Employee benefits |
|
|
1,600 |
1,600 |
1,600 |
|
Percentage tax payments |
|
|
801 |
801 |
879 |
|
Income Tax payment |
|
|
|
|
678 |
|
Total Cash Applied (OUTFLOW) |
70,000 |
14,735 |
18,636 |
20,266 |
23,792 |
|
|
|
|
|
|
|
|
Cash Ending Balance |
18,100 |
24,065 |
32,129 |
40,563 |
50,271 |
· Excerpts from the Chapter on The Project Feasibility Study, Introduction to Entrepreneurship.
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