Cash Flow: The Lifeblood of Your Company
Author: Anthony T. Busch
November, 5, 2005
Some one once asked, “What is the definition of cash flow?” In its simplest terms, it is the timing of the amount of cash coming in compared to the timing of the amount of cash going out. It is the recognition of these components that leads to an understanding of the cash position and successful management of the cash flow of the company. Knowing when the cash is coming in and when it is going out is crucial to the sound management of any business enterprise.
When borrowing money from a lending institution it is imperative that the business owner fully understand his cash flow. The lender will consider the cash flow of the business as the primary source of repayment of any loans extended to the business. While the lender will also secure the loan with collateral in an amount sufficient to protect the lender from any risk of loss due to possible non-payment of the loan, the collateral is not the primary source of repayment. Borrowers should always be very cautious when borrowing money based solely on the value of the collateral. Lenders are primarily interested in the cash flow of the business enterprise, with a secondary interest in collateral.
Two assets that require extensive management are accounts receivable and inventory. These two assets require considerable amounts of cash to support them. If the inventory is not turned over efficiently and the subsequent accounts receivable are not collected on a timely basis, the company can suffer a significant loss of profits. Consider for a moment that the company must pay for the inventory, add value to it, and sell it generating an account receivable. Depending on the time this takes (a reflection of efficiency) the company may or may not make a profit on that job. While the company waits for the cash from the account receivable to arrive, it must continue to pay overhead expenses. The amount of cash available will determine how long the company can self-fund its operations before having to borrow money from the lender, usually in the form of a working capital line of credit.
Successfully managing the cash flow of the company requires that the owner thoroughly understand the costs of operations and the efficiencies of accounts receivable and inventory. This is just an example of how the business owner can improve the cash flow in the company. Fully understanding the cash flow in the company requires consistent measurement and input from several advisors. One of those advisors is the business loan officer. The lender is a very important partner in the success of any business enterprise. They are indeed a good partner to have.
November, 5, 2005
Some one once asked, “What is the definition of cash flow?” In its simplest terms, it is the timing of the amount of cash coming in compared to the timing of the amount of cash going out. It is the recognition of these components that leads to an understanding of the cash position and successful management of the cash flow of the company. Knowing when the cash is coming in and when it is going out is crucial to the sound management of any business enterprise.
When borrowing money from a lending institution it is imperative that the business owner fully understand his cash flow. The lender will consider the cash flow of the business as the primary source of repayment of any loans extended to the business. While the lender will also secure the loan with collateral in an amount sufficient to protect the lender from any risk of loss due to possible non-payment of the loan, the collateral is not the primary source of repayment. Borrowers should always be very cautious when borrowing money based solely on the value of the collateral. Lenders are primarily interested in the cash flow of the business enterprise, with a secondary interest in collateral.
Two assets that require extensive management are accounts receivable and inventory. These two assets require considerable amounts of cash to support them. If the inventory is not turned over efficiently and the subsequent accounts receivable are not collected on a timely basis, the company can suffer a significant loss of profits. Consider for a moment that the company must pay for the inventory, add value to it, and sell it generating an account receivable. Depending on the time this takes (a reflection of efficiency) the company may or may not make a profit on that job. While the company waits for the cash from the account receivable to arrive, it must continue to pay overhead expenses. The amount of cash available will determine how long the company can self-fund its operations before having to borrow money from the lender, usually in the form of a working capital line of credit.
Successfully managing the cash flow of the company requires that the owner thoroughly understand the costs of operations and the efficiencies of accounts receivable and inventory. This is just an example of how the business owner can improve the cash flow in the company. Fully understanding the cash flow in the company requires consistent measurement and input from several advisors. One of those advisors is the business loan officer. The lender is a very important partner in the success of any business enterprise. They are indeed a good partner to have.
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