Cash flow refers to the amounts of cash being received and spent by a business during a certain period of time. Cash flow reports are used as a financial planning tool for specific projects or businesses. A cash flow projection sets out all the expected payments and receipts in a given period. Managers use cash flow projections to arrange for employees and creditors to be paid at appropriate time. The transactions that are displayed in a cash flow chart are expected revenue, incoming and outgoing loan repayments, sales, material, labor and purchase of capital goods.
Cash flow statement is a financial report, which only shows incoming and outgoing money during a particular period. It doesn’t include non-cash items such as depreciation or purchases on credit. The report allows managers to analyze the short-term viability of a company. People who are interested in cash flow statements are accounting personnel, potential lenders and creditors, investors, employees and contractors. It is an important factor for start-up companies with limited liquid assets as they are vulnerable to devastating cash shortages and unexpected expenses.
When predetermined cash receipts are available they can be valued as assets. Such income streams can be purchased or sold due to the present value of their future cash flows. Most of the income streams that are bought, sold or brokered are privately owned by individual consumers or businesses rather than by banks or other financial institutions. There are many reasons one may need or want to sell cash flow such as to maintain a steady flow of working capital and to increase financial flexibility by converting non-current assets into ready cash. The cash flow funding process can be applied to annuities, leases, insurance benefits paid in installments, retirements accounts, royalties, lottery winnings and tax lien certificates.
When planning the short-term or long-term funding of a business, it is more important to anticipate the cash requirements than to just project profitability. The difference between sales and costs is a vital indicator of the performance of a business. The generation of a profit does not guarantee a business’ development or even the survival. Study of the cash flow and proactive steps to develop a healthy and positive cash flow assures the stability of any business.
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