Cash Is the Life-Blood of Any Business and Without It Survival Is Very Unlikely.
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Cash is the life-blood of any business and without it survival is very unlikely. Cash is normally regarded as “just an asset that a business needs to help it to function (Atrill & McLaney, 2004, p. 124).” Though this is true, cash is also one of the essential elements needed for a business to grow and prosper. The reason why cash is so important is because “people and organisations will not normally accept other than cash in settlement of their claims against the business. If a business wants to employ people it must pay them in cash (Atrill & McLaney, 2004, p. 124).” If a business doesnt have enough cash to pay its employees and suppliers, such a business will not prosper, and it would not take long before such a business ultimately fails.
Cash is needed by every business to pay its bills and to pay off its liabilities on time so that it can survive. For this reason, it is very important for every business to monitor its cash flow in order to adequately plan expenditures. Cash flow can be defined as “the total amount of money being transferred into and out of a business, especially as affecting liquidity (Hanks,2001, p. 283).” Cash flow shows us how the company has performed in managing inflows and outflows of cash and~provides a sharper picture of the companys ability to pay bills and creditors, and to~finance growth. Cash flow management is very vital to the survival of every business. It is through cash flow management that managers can monitor cash movement over a period of time.
Cash flow shows whether a business is generating enough cash to meet its obligations and how payments due to suppliers and staff can be related to cash inflows from sales. Cash inflows “are the movement of money into a business, while cash outflows are the movement of money out of a business (www.cimaglobal.com).” Cash flow statements are used to report the uses of cash and the beginning and ending values for cash and cash equivalents each year of a business. Operating cash cycle is “the length of time for a company to acquire materials, produce the product, sell the product, and collect the proceeds from customers (www.swcollege.com).” In every business, there is an operating cycle through which cash flows. This operating cash cycle is measured by the rate of flow of assets into cash. The operating cash cycle is important because without this cycle, the cash flow cannot be monitored effectively. The cash flow of a business can be improved if the business is able to shorten the operating cash cycle, from the time the business acquires materials and sells the product until the time they collect the proceeds from customers, the business will generate more cash or need less money to acquire more materials. This is because time is very important, and the shorter the time, the faster the cash inflow. It is very important that there is a short operating cash cycle, so that the business never runs out of money to pay its liabilities.
Cash Flow Statements show the sources and uses of cash and are typically divided into three components:
Operating Cash Flow, which covers sales and business expenditures
Investing Cash Flow, which covers asset sales and purchases
Financing Cash Flow, which covers loans payments and proceeds, and owner investments and withdrawals
Operating cash flow is normally referred to as working capital. It is the cash flow generated from internal operations such as the sale of products and services and the purchase of supplies and other general business expenditures. Operating cash flow reflects the daily activities of a business, and shows the cash inflows and cash outflows of the business. Working capital management involves the amount of capital which is readily available to a company. It is the differences between a companys current assets and its current liabilities.