What is Cash Flow?

Story by Count Me In on 01/28/09 • 554 reads • ShareThis
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Cash flow is simply the movement of money in and out of your business. When you first purchase the goods or services you will sell, this begins the process called cash flow. When you make a sale you deliver a product and payment is then received – either at that moment, or some time in the future. Your cash flow is impacted by the length of time between when you pay for your inventory and when your customer pays you.

Let’s look at an example. Elena of Elena’s Edibles has wholesale customers. She buys fresh fruit and chocolate to produce her chocolate-covered strawberries. She makes them, delivers them and invoices the customer. She will be paid at a later date. Because she delivers the products in advance and sends the customer an invoice to be paid at a later date she creates an accounts receivables or future cash inflow.

Elena delivered goods to a customer and she has to wait until she is paid. She has extended credit and taken on the risk that her customer will pay on time. To make her product, she bought supplies and owes money to her supplier. That created an accounts payable or future cash outflow . The inflow and outflow form the process of cash flow.

Elena has created expenses that have to be paid out and is waiting for payment to come in. However, cash is only flowing in when you receive payment. This period is called the cash conversion period and can seriously impact your businesses ability to function.

Cash conversion is simply turning your sales (accounts receivable) into cold hard cash. Decreasing the time it takes for you to receive payment should be your goal.

Cash management works both ways: by paying your accounts payables on time, you can take advantage of any discounts offered by your suppliers as well.

Managing the cash flow process can help you:

  • Have the money to pay your employees, suppliers and yourself.
  • Negotiate better terms with your suppliers.
  • Identify problem customers.
  • Decrease accounts in credit collection.
  • Have a larger cash balance in checking earning interest.