This post is part of the Finance for Non-Financial Managers book series of posts, which is the first subset of posts in the larger PMBA series of posts. You can buy Finance for Non-Financial Managers from the author Gene Siciliano for $14.95.
Chapter Summary
- Cash cycles are the tracking of cash into usable resources for the business and back into cash again (hopefully more cash). Many cash cycles occur at the same time, and it is the manager’s job to keep an eye on how well the process is flowing.
- Net cash flow and net profits are never the same. Managers should keep track of both.
- Fast growing companies need more cash than most, so it is the manager’s job to arrange multiple lines of credit, before they are needed.
- Investments into inventory and accounts receivable (giving customers credit), risk being lost before turning back into cash.
- Cash flows forecasted six to 12 months, allow a manager ample time to secure lines of credit for when they will be needed.
Cash Flow Cycle
A business starts with cash, has some setup costs, buys assets, obtains credit, produces something, sells it, collects the revenue and turns it back into cash.
Obtaining credit allows a business to leverage more money than it would otherwise have. Making $5,000 turn a margin of 10%, when the bank loan only cost you 4% is a wise investment.
More businesses fail because of cash flow issues, rather than not having enough profits.
Cash Basis vs. Accrual Basis
There are different ways to account for your revenues and expenses. One, is by keeping track of when money leaves the account and when money comes into the account. The other, more common method, is to record items when they happen, even if the actual exchange of cash is later.
Three reasons for a business to use accrual accounting are:
- concerns about gross margin
- needing to know when they’re making money, and when they’re not
- relationships with lenders, investors and the government require the accounts to be kept that way
Net Profits vs Net Cash Flow in Your Financial Reports
- increase profits w/o increase in cash (accts receivable)
- decrease in profits w/o decrease in cash (accts payable, net30)
- increase cash w/o change in profit (loans)
- decrease cash w/o change in proft (paying a loan back)