May 16, 2021

Income Terminology and the Business Owner

Small businesses proprietors often fail to understand the consequences of inadequate cash flow management until the harsh realities of business life start working. Typically one significant occasion is definitely when insufficient funds are available inside the business to meet the business liabilities.

It may be that business plans have been developed, income statements prepared and money flows projected. The business owner might have been actively involved in this work or even may have delegated the task to a third party and treated the business planning process as a desk top exercise.

Adopting the completion of the plans and reviews, what follow up action was used?

Were those same plans submitted, not subsequently reviewed and no further actions taken to bring any actual results that were worse than forecast back to plan?

If this scenario can be familiar a contributory factor may be a lack of understanding of what the terminology used actually means and may scare the business owner from taking action.

To assist enhance the knowledge of the small business owner some of the common terms associated with cash management are explained below.

Cash Balance
The amount of money belonging to the business and available to legitimately expend, or the amount of money the business owes to a financial institution usually by using a bank overdraft facility.

Cash Flow
Merely cashflow is the difference between monies coming into the business and monies going out of the company, and measured across a period of time. The measurement may be a day, a month, season or such period the business proprietor may determine.

Actual Cash Flow Statement
This is an analysis of all cash flow actions during the given period of time. It will sum it up all monies received and monies expended. There are three elements to consider and report on. These are:

: the operating activities (cash circulation from selling goods and income from paying expenses)

– the changes in fixed assets (cash flow from sale or purchase of assets)

– the modifications in forms of finance (Cash flow from borrowing or repaying loans and cashflow movements in contributions by and distributions to owners)

Cash Flow From Operations
This is the area of the cash flow that is directly attributable to the performance (profitable or otherwise) from the business. Excluded from these numbers will be cash movements related to items for example extraordinary events and sale or purchase of assets.

Cash flow from operations is the sum of the income for the period in question plus the value of the non-cash items, such as devaluation, that have been charged against profits. For this figure is added or deducted the movement in working funds during the period to give the Cash Flow through Operations.

Cash Flow from Non-Operational Actions
Included under this head will be included all cash movements developing within the business not directly associated with normal trading activities. This will include however, not limited to the sale or buy of fixed assets, for example plant and machinery and furniture and fittings; together with an increase in or even repayment of business loans.

Source and Application of Funds
This term can be used to differentiate between the monies entering a business and the monies going out. Monies coming into a business will be the source and can include sales cash received, proceeds from the sale of a fixed asset and the increase in loans borrowed.
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The application of funds relates to cash that is expended by business, and would include the payment of goods or services, the buy of fixed assets or the pay back of business loans.

Forecast Cash Flow Statement
A similar convention to the Actual Cash Flow Statement, however , this will project the anticipated cash flow movements for some long term period of time.

Cash Accounting
A method of accounting that records in the books associated with account cash receipts as a sale on the day the cash is received and treats cash payments as costs on the day of payment.

Profit v. Cash
The profit of a company should not be confused with the cash placement of the business. A satisfactory cash flow position will almost certainly be dependent upon profits getting generated.

However , remember that high non-operational cash outgoings may significantly slow up the operational cash generated resulting in a money balance much lower than the reported revenue.

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