Business and Entrepreneur

Lets Decode Cash Flow

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THE CASH FLOW CYCLE* You need cash to pay for… TERMS YOU SHOULD KNOW • Cash inflows: This is the cash that comes into your company. You get cash inflows when you borrow money (financing), collect payment for your products or services (oper- ations), or earn income on invest- ments (investing). • Cash outflows: This is the cash that goes out of your company. You cre- ate cash outflows when you pay for expenses, investments and loans. • Cash on-hand: This is the cash that you have available now to use in your business. Materials, wages, and rent, oh my! You collect money for the sold products Products are produced Products are sold *as seen in textbooks REALITY CHECK Hold up. It's only in diagrams and dreams that your cash flow ever really looks like that. In real life, it's usually a lot messier. Sometimes your cash outflows happen before your cash inflows. You may not get paid for a purchase until weeks after it happens, or you need to buy materials before you make a sale. If you're paying out more than you're getting in at any point, it creates a cash-flow gap. That doesn't mean you won't end up making a profit once you get that cash inflow you're expecting, but a cash- flow gap creates real financial headaches if you don't have the cash on-hand to cover expenses. WHAT IMPACTS CASH FLOW? • Accounts receivable: The sales you've made that a customer hasn't paid for yet. • Credit term: The time limits you've set for your customers to pay you. • Credit policy: The guidelines you use when deciding whether or not to extend credit to a customer, and on what terms. • Inventory: The extra supplies or products that your business keeps on hand to meet sales demands. • Accounts payable: The amounts you owe to suppliers that you'll have to pay for at some point in the not-too-distant future.

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