Cash Flow - 

bloodstream of business 

Part 1 of 2

 

Money makes the mare go so goes the saying. And it is true. The continuous flow of cash coming in to and out of the business is indispensable. Cash flow is truly the bloodstream of business. Without it the heart of business will stop beating.

Despite knowing how critical cash flow is to a business, sadly, it is not understood by managers well. There is a certain mystical air about cash flow that puts non-financial managers off. It even confuses many financial managers.

Don't get me wrong. It is not that non-financial managers do not understand cash flow because they cannot. It is just that nobody has explained the concept in simple terms. Accountants tend to make things complicated. It is what makes their position and title an intimidating one.

Anyway, that is a thing of the past. Cloud Academy's no-nonsense explanation of cash flow concepts visually will have you understanding it in no time. We will break the explanation into 2 parts. This is Part 1 of 2.

Flows Vs Balances 

The first concept you need to understand in cash flows is that there is a huge difference between cash balances and cash flows.

Let us define what each means. Cash Balances include physical cash (currency notes) and cash in Bank. These are normally called liquid assets. A liquid asset is anything which is the equivalent of actual cash or which can be converted easily into cash. In this conversion category comes assets like Accounts Receivables. You will learn about Accounts Receivables in Part 2 of this Cash Flow two part feature.

Watch this short video on this powerful concept

To put it simply, cash balances are at a certain point of time. For example, your hotel's cash balance on 31 March 2013.

Cash flows however happen between two points of time. For example, your hotel had a cash balance on February 28, 2013. Cash flow is the difference between your hotel's cash balance on 28, February 2013 and 31, March 2013.

Note that this flow may be negative or positive. This means that if your hotel cash balance on 31, March 2013 is higher than on 28, February, 2013, then the cash flow is positive, otherwise it is negative (if 28, February 2013 balance is higher than 31, March 2013).

Thus, when you are measuring cash flow you are focusing on the "movement" or change and not on physical balances. This is what confuses managers the most.

In Part 2 of this Cash Flow concept simplification, I will share with you a live example of how cash flow is calculated and how to reconcile it with Profits.

Don't miss Part 2. It will have you understand the cash flow concept as well as any financial manager does or even better.

If you have any questions on this topic, write to me at narasimhan@elearningcloudacademy.com.

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