by Michael Blair
Several questions have come in asking about cashflow, "What is it?", "Why do I care about it?", "Should I care about it?". So, our first article is going to address this issue.
There are several statements that Accountants use to define and fairly present the financial health of a company, whether it's a Mom & Pop shop or a mega-corporation. Three of the most commonly used statements are the Profit & Loss Statement (Income Statement), the Balance Sheet (Assets, Liabilities & Owner's Equity) and Cashflow Statement ("Where'd my cash come from and where'd it go?"). A company without cashflow is no company. During start-up, we trade our time for cash. In other words, we work for little or no pay.
However, once the company is up and running we need to hire employees (ourselves, of course) and we need to fuel growth. The development stage of financing, almost without exception, takes longer than anticipated. Rapid expansion has many cashflow needs, and in each of these there are cashflow traps. The most prominent, and the ones that can be systematically tracked, semi-influenced, and controlled, are inventory and receivables.
Our inventories are usually defined as equipment, tools, repair materials and camouflaging materials (paints and stains). We usually are not able to acquire every piece of equipment and color of paint or stain under the sun in the beginning. Thus, we buy more stuff as our cash permits. Receivables are basically work that we have performed and are waiting to have picked up and paid for. If these receivables build up too much, you are in essence being someone else's banker.
In the accounting world there is a statement that reflects all of this activity. You
may have heard it call the Source and Application of Funds Statement (this sounds
impressive to non CPA types) or commonly called a Cashflow Statement.
The statement of cashflow is used primarily to assess performance in two basic areas: (1)
a company's ability to generate cash and (2) the effectiveness of a company's cash
management. The ability to generate cash is determined by the strength of the company's
operating activities. Effective cash management involves managing these cash sources and
uses in a way that provides a high return without bearing too great a risk of insolvency.
There are 2 basic ways to acquire cash: Debt and Equity. Debt, which means you are borrowing such as from the bank, credit cards, relatives, etc. Equity, which can be in the form of Retained Earnings, selling stock in your company, etc. You will probably need to use some of both methods to be successful.
An example of a simple Cashflow Statement:
Operating activities
| Cash received from customers | 60,000 |
| Cash paid to suppliers & employees | <52,000> |
| Interest Received | 250 |
| Interest Expense | <100> |
| _______ | |
| Cash provided <used> by operating activities | 8,150 |
| Cash & cash equivalents @ beginning of year | 2,000 |
| Cash & cash equivalents @ end of year | 10,150 |
This is a general overview of cash flows. There should be some sort of cash flow analysis
in every company's business plan. Successful small business people recognize that the
financing of their companies, if not a full-time occupation, is at minimum a full-time
preoccupation. It requires the relentless pursuit of cashflow to survive till harvest
time. Future articles will go over other accounting statements, business plans, marketing,
flow of restoration activities and any other topics that I am requested to write about.
Please send your questions & comments to my e-mail address: mblair5028@aol.com
Michael Blair is president of Restorations by Michael, Inc. He has a BS in Accounting
and a MS in Business Administration.. He is been restoring ceramic art and art glass for
over 9 years. He also sells Milliput to the trade.