Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, limited period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company’s value and situation. Cash flow can be used, for example, for calculating parameters: it discloses cash movements over the period. to determine a project’s rate of return or value. The time of cash flows into and out of projects are used as inputs in financial models such as internal rate of return and net present value. to determine problems with a business’s liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash even while profitable. as an alternative measure of a business’s profits when it is believed that accrual accounting concepts do not represent economic realities. For instance, a company may be notionally profitable but generating little operational cash (as may be the case for a company that barters its products rather than selling for cash). In such a case, the company may be deriving additional operating cash by issuing shares or raising additional debt finance. cash flow can be used to evaluate the ‘quality’ of income generated by accrual accounting. When net income is composed of large non-cash items it is considered low quality. to evaluate the risks within a financial product, e.g., matching cash requirements, evaluating default risk, re-investment requirements, etc. Cash flow notion is based loosely on cash flow statement accounting standards. It’s flexible as it can refer to time intervals spanning over past-future. It can refer to the total of all flows involved or a subset of those flows. Subset terms include net cash flow, operating cash flow and free cash flow. Symptoms of cash flow problems. There are many reasons a business can suffer cash flow problems – some are down to mismanagement and poor decisions, and in some cases factors outside of your control. If you are suffering from any of the following symptoms then your business is experiencing cash flow problems: Up to overdraft limit – no headroom / returned payments? Stretch to pay salaries each month Trade creditor arrears HMRC arrears Rent arrears No working capital ‘buffer’ – surviving day to day Negative working capital on balance sheet – over geared / losses? Lack of funds for remedial action (redundancies / premises relocation) Lack of profitability – insufficient to support owner / manager’s lifestyle Unable to pay for professional advice
