What is Cash Flow Planning?
Understanding Cash Flow Planning
It is important to know that when trying to understand what cash flow planning is to first know what cash flow statements are. Cash flow statements are one of the three major financial statements. They bridge together the income statement and the balance sheet by showing how all the money moved in and out of the company. The three sections that make up a cash flow statement are listed below.
- Operating Activities– The revenue-generating activities of the company, any cash flows from current assets or current liabilities.
- Investing Activities– Includes cash flow from acquisition and long-term asset disposal or other investments.
- Financing Activities– Cash flows that result in changing the size and composition to contributed equity capital or borrowing of entities.
What the Cash Flow Statements can tell us and how we learn to start Cash Flow Planning
Cash from the operating activities can be put side by side to the company’s net income to determine the quality of earnings. If cash from operating activities is determined to be higher than net income, then one can state the earnings are said to be of “high quality”. When looking at it from another perspective this statement is useful to your potential investors. It will allow them to have an overall sense of the company’s cash inflows and outflows to help gain insight on company performance. With all of this being said, depending on what your cash flow statements show you and your company, the cash flow statements will lead you into how to plan your cash flow to set up your company for future success.
What is Cash Flow Planning?
It does not matter whether on an individual level or company level, staying on top of finances is very important with budgeting and cash flow. On this page the focus will be on the company level of cash flow. For companies, when talking about cash flow it is about balancing cost and earnings. What is cash flow planning and how will it benefit your company? When it comes to cash flow planning this type of financial planning refers to all forms of assets that come and go from your company. Companies value cash flow because it allows for clear visibility on what they owe and what they are earning.
Cash Flow Planning in a Business
Although many businesses already have a cash flow in place, it is important to have when looking to properly balance costs and earnings. Some examples of what companies might look to balance are operating expenses such as, rent, taxes, salaries, loans raw materials and more. When these companies make sales however, they will need to also know this will create a positive impact on the profit and loss statement. With properly evaluating a cash flow plan, companies will be able to sustain its business model. When not having a proper cash flow plan companies make experience consequences like raising capital short-term, taking out a loan, or even a complete shutdown.
To ensure a quality cash flow plan companies need to note what they plan to spend and earn within a given time period. By subtracting the company’s accounts payable by accounts receivable, the company will reach their numbers on their spending’s and earnings. Accounts receivable will track the assets that are coming into the company. In most all companies this is the money earned from goods and services provided. As for accounts payable, this will be your company’s liabilities like payroll, taxes, and more.
To set up your company for future success it is important to look at what your financial statements are telling you and to start your cash flow planning now. As the old statement goes, “cash is king”!