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Manage your cash flow

Tracking your cash flow can help you gauge the health of your business.
By Henry Ong |

Have you ever wondered why you sometimes can’t find your profits in your bank account? Your business could be doing great and reporting huge net monthly incomes, but when you check your cash balance, you are perhaps often at a loss where your money went.


You then try to compare your balance sheet for two consecutive periods to see whether your cash has increased or decreased, but you couldn’t uncover the reasons either why your cash balance has changed. Finally, you check your income statement to look for leads on where the cash from the reported sales and expenses for the period might have gone, but the income statement can’t give you that information either.


The explanation for the cash movements in your business—where the cash came from and how it was spent—can actually be found in the cash flow statement, which can be created without requiring new data. This is because the needed information can be derived from your balance sheet and your income statement themselves. However, because preparing a cash flow statement involves converting certain financial data from accrual-basis accounting to cash-basis accounting, doing the cash flow statement is actually not a very easy task.


For example, when you record an increase in accounts receivable from additional sales, that increase would require a corresponding deduction from your cash balance. This is because by selling merchandise on credit, your business is in essence lending cash to your customer to buy products from you.


The cash flow statement can do several important things for you. By looking at your company’s historical cash receipts and disbursements, in particular, you can make a reasonable forecast of your future cash flows. You can also use the past figures as a basis for designing your cash flow budget. And since the cash flow statement also records your company’s various investment activities (such as acquiring equipment and other making capital expenditures), you can use the information to evaluate whether management had made good investment decisions or not.


You can also check from the cash flow statement where the cash of your company comes from and how your company is using it. Of course, since your business may spend not only for fixed asset investments but also for paying bank loans and dividends to investors, you can also use the cash flow statement as a guide for predicting if your business is capable of paying dividends in the future.


Generally, too, when rising net income leads to higher cash levels and vice versa, there would be times when the company’s cash and net income won’t go hand in hand. It is possible for you to register a net income but not actually get any cash during a particular period. For example, you may have sold products mostly on credit. Thus, your books would be recording sales and a corresponding net income even if cash actually goes into your bank account. This is one of the few instances where you need to make use of data from the cash flow statement to analyze the cause and effect of such an outcome.



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