Cash flow and sound financial management

By Arlene E. Liberal

cash flow pesos

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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