Difference between revisions of "Introduction to entrepreneurship/IENT103/Statements/Cash"

Revision as of 19:40, 20 January 2019

“A cash flow statement is a financial statement that measures the cash generated or used by a company in a given period. It typically sets out a company's cash sources and uses for the period into three categories: cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities.” Investing Answers

The cash flow statement (sometimes called the 'statement of cash flows') reflects the actual amount of money the company receives from its operations. It reports on the cash coming in and going out during the time interval specified in its heading (for instance, the heading may state "For the Three Months Ended June 30, 2018" or "The Fiscal Year Ended December 31, 2017"). That time period is chosen by the company.

A cash flow statement can be retrospective (in other words, it reports on what has already happened), or it can be a forecast (estimating what the cash flow is likely to be in the future). THis is one reason why the dates need to be made clear in the statement's heading.

If more money is coming in to your business than is going out, you are in a "positive cash flow" situation and you have enough to pay your bills. If more cash is going out than coming in, you are in danger of being overdrawn, and you will need to find money to cover your overdraft(s). This is why new businesses typically need working capital, in the form of a loan or line of credit, to cover shortages in cash flow. ^[1] Lack of capital and/or poor understanding of cash flow is one of the main reasons for small businesses failing. ^[2]

Managing cash flow can be particularly difficult when you are starting a business. You have a lot of expenses to cover, and you may have no sales or customers who are paying you yet. Other temporary sources of cash, like a temporary line of credit, can help get you going and into a positive cash flow situation.

Cash flow is also important for seasonal businesses - those that have a large fluctuation of business at different times of the year, like holiday businesses and summer businesses ^[3].

Required reading

Read the following texts:

1. Cash Flow Statement by Entrepreneur.
2. Analyze Cash Flow The Easy Way by Investopedia.
3. Sample Cash Flow Statement by Nolo. An excellent worked example of a cash flow forecast or projection. This can help you look ahead and see when there may be challenges with cash flow, so that you can plan in advance (for instance, by reviewing the terms of any credit sales / accounts receivable). It is good practice to prepare this type of cash flow forecast, and then to compare it with actual figures.

WEnote

Thinking about your own entrepreneurial idea, create a spreadsheet (like the example in number 3 above) and examine your "Cash at End of Month" over the year. (: SW - Is this asking too much just for an activity on this page? I don't think we've asked them to think about real figures for their business anywhere else, have we? Should we leave this until the learning challenge, when we ask them to do all three statements and give them a bit more guidance? Maybe substitute an exercise similar to the previous ones, where they look at a simple cash flow statement and answer a couple of questions about it. Or ask them in general terms what they think the biggest problem in cash flow will be for their business idea (e.g. late bill-payers, high fixed costs etc.). What do you think, CG?)

Do you foresee any months where your cash flow will go negative? What could you do to correct this?

Post your comment(s) below, and then look on the course feed page to see what others have posted.

If you prefer, you can create a post on your learning journal blog. Be sure to label or tag your post IENT103.
Note: Your comment will be displayed in the course feed. (: SW - If we are sticking with the spreadsheet task, I think we need to clarify what we want them to put in the WEnote. Do we want them to post their spreadsheet (not sure this is possible), their answers to the two questions, or some general comments on their spreadsheet?)

References

1. ↑ The balance: Small business
2. ↑ Business know-how
3. ↑ The balance: Small business