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  • James Wylie

Cash Flow, Lifeblood of Business

Whether you are a small business or a large conglomerate, the major consideration, in fact THE most important consideration is Cash Flow. Without it, businesses will find it very hard to manage themselves on a daily basis. As a business owner or manager, you want to manage the flow of cash so that it always remains positive. Large companies will often use the phrase Working Capital, which is synonymous to Cash Flow.


So for the un-initiated, Cash Flow is simply the amount of cash the business has on hand at a set point of time and is calculated by subtracting outflow of cash to inflow of cash. The inflows can be the receivables that companies have and the outflows are the payables to vendors, payroll, interest expense or operating expense . Working Capital is part of the quarterly earnings statements and is often scrutinized by analysts. It is the measure of solvency of a company and is calculated by subtracting current liabilities from current assets. It is possible that companies can be “profitable” but be insolvent.


For large corporations, when they run into cash flow problems, they would have a line of credit from banks to carry them through with short term borrowing. Large companies have the advantage of having assets which can be collateralized, not a desirable situation and not very frequent. Large companies will often ask for extended Payment Terms to their creditors while insisting on quick receivables from their customers. Large companies will often incentivize their customers by offering discounts if they can pay early. You will see payment terms of 2 % 15 Net 30 which means that customers will get a 2% discount off the price if they pay within 15 days of the invoice. This is more desirable than doing short term borrowing which can cost a company 2% plus prime rate.


For small businesses, it is important that they maintain positive cash flow. Without the luxury of having large assets to collateralize, it is more costly for them to do short term borrowing. Retailers obviously will get their money at the point of sale and mostly with credit cards. As an owner it so important to maintain that positive cash flow so you can meet your debt obligations as well as meeting payroll every month. Otherwise, you will find that doing business will cost you more money.

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