2 Cash flow management

Every entrepreneur needs to think about money – making money, investing money, spending money, having enough money to pay the bills. But have you ever asked yourself, ‘What is money?’ Sometimes it appears to be so important that you could be forgiven for thinking that money is all that entrepreneurship is about. Of course, entrepreneurship means many more things and money is only one of them.

About two-thirds of small businesses face money problems. Reasons for these problems are, for example:

  • difficulties in collecting money due from customers

  • seasonal variations in sales

  • critical incidents, such as increasing prices for raw materials or an unexpected decrease in sales.

All enterprises have different cash-to-cash or operating cycles; i.e. the time it takes for a business to access capital and resources, produce and sell its goods and services, and collect cash from sales. Depending on the type of business, the cycle can take just a few hours or up to several years.

Many small businesses fail because they underestimate the time lag between receiving cash and spending cash, or they experience a mismatch between the size of payments received and the size of payments that must be made (Burns, 2016). To avoid these problems you need to understand the flows of money that come in and go out, chiefly the basics of managing cash flow.

Cash can come from three different sources:

  • Operations, which includes the sales of goods and services that you produce, and collecting cash from customers.

  • Investing, which comprises buying and selling shares, bonds, land, buildings and equipment.

  • Financing, which means either cash given to the business in return for ownership (i.e. equity) or money borrowed from other sources, such as banks.

To understand the inflow and outflow of money, watch the following video, Financial Statements Explained in One Minute: Balance Sheet, Income Statement, Cash Flow Statement.

Financial statements explained in one minute
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The video introduced three important documents that you need for your cash flow management:

  • the balance sheet, which reflects your past operations and the net worth (equity) of your enterprise

  • the profit and loss statement, which is sometimes referred to as an income statement and thus shows how profitable your enterprise is

  • the cash flow statement, which shows the inflow and outflow of your money and thus indicates how credible your profit numbers in the profit and loss statement are.

1 Funding strategies

2.1 Profit and loss statement