Page 110 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Unit 7: Cash Management

7.1 Aspects of Cash Management Notes

Business analysts report that poor management is the main reason for business failure. Poor
cash management is probably the most frequent stumbling block for entrepreneurs.
Understanding the basic aspects of cash management will help you plan for the unforeseen
eventualities that nearly every business faces.
Cash vs. Cash Flow

Cash is ready money in the bank or in the business. It is not inventory, it is not accounts
receivable (what you are owed), and it is not property. These can potentially be converted to
cash, but can’t be used to pay suppliers, rent, or employees.

Notes Profit growth does not necessarily mean more cash on hand. Profit is the amount of
money you expect to make over a given period of time, while cash is what you must have
on hand to keep your business running. Over time, a company’s profits are of little value
if they are not accompanied by positive net cash flow. You can’t spend profit; you can only
spend cash.

Cash flow refers to the movement of cash into and out of a business. Watching the cash inflows
and outflows is one of the most pressing management tasks for any business. The outflow of
cash includes those checks you write each month to pay salaries, suppliers, and creditors. The
inflow includes the cash you receive from customers, lenders, and investors.

Did u know? What are positive and negative cash flows?
1. Positive Cash Flow: If its cash inflow exceeds the outflow, a company has a positive
cash flow. A positive cash flow is a good sign of financial health, but is by no means
the only one.

2. Negative Cash Flow: If its cash outflow exceeds the inflow, a company has a negative
cash flow. Reasons for negative cash flow include too much or obsolete inventory
and poor collections on accounts receivable (what your customers owe you). If the
company can’t borrow additional cash at this point, it may be in serious trouble.

Components of Cash Flow

A “Cash Flow Statement” shows the sources and uses of cash and is typically divided into three
components:
1. Operating Cash Flow: Operating cash flow, often referred to as working capital, is the
cash flow generated from internal operations. It comes from sales of the product or service
of your business, and because it is generated internally, it is under your control.
2. Investing Cash Flow: Investing cash flow is generated internally from non-operating
activities. This includes investments in plant and equipment or other fixed assets, non-
recurring gains or losses, or other sources and uses of cash outside of normal operations.
3. Financing Cash Flow: Financing cash flow is the cash to and from external sources, such as
lenders, investors and shareholders. A new loan, the repayment of a loan, the issuance of
stock, and the payment of dividend are some of the activities that would be included in
this section of the cash flow statement.

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