Cash Flow Management Techniques

The old mantra that Cash is King is even more important in today’s economy than ever before.  The access to loans and private equity has never been tougher to obtain.  While it seems that the credit market has at least stabilized, obtaining cash to grow your business or to maintain the company’s operations is still very difficult.  The most important reports that an investor or bank will want to see are the company’s cash flow statement and the cash flow forecast.  The cash flow statement tells the story about how cash was used in the past, while the cash flow forecast tells how cash will be generated and used in the future.

The Cash Flow Statement

The cash flow statement is a standard report generated from your accounting system.  The cash flow statement should be run from the start of your fiscal year to the last day of the month the financial statements were closed.  The cash flow statement documents the increases or decreases in your balance sheet accounts from one period of time to another based on the start date and end date of the report.  The cash flow statement takes the Net Income and adjusts for the increase or decrease in operating activities, investing activities and financing activities to determine the net cash change.  The net cash change coupled with the beginning cash balance will equal the ending cash balance at the end date of the report.  The cash at the end of the period on the cash flow statement must equal the total ending cash balance on the balance sheet.  The Net Income from the Income Statement must also equal the Net Income on the Cash Flow Statement.   Therefore, the following formula summarizes the cash flow statement.

Net Income (Must equal Income Statement at the end of the period)

+/- Cash from Operating Activities
+/- Cash from Investing Activities
+/- Cash from Financing Activities
= Net increase or decrease in Cash for the Period
+ Cash at beginning of Period (Must equal Balance Sheet Beginning Balance)
= Cash at the end of the Period (Must equal Balance Sheet Ending Balance)

The Cash Flow Forecast

The monthly cash flow forecast tells the user the company’s expected sources and uses of cash.  Sources of cash are defined mainly as cash received from product sales or services and uses of cash are mainly cash used to cover expenses.  The cash flow forecast should be based on the budget.  However, if your company is accounting on the accrual method, you will need to convert the budget to cash basis. For example, in accrual method of accounting, revenue and expenses are recorded in the month service or products were earned or rendered.  However, just because you earned the revenue does not mean that the cash will be received in the same month.  Normally, there is a delay in obtaining the cash.  In addition, there is normally a delay in paying expenses.  For example you might spend money on supplies in April, in which, it will be shown on the accrual budget in April, but for cash flow forecast purposes the cash will be released in May.  Therefore the following formula summarizes the cash flow forecast.


+ Deposits
+ Investors
+ Interest Earned
= Total Sources


– Payroll Disbursements
– Accounts Payable Disbursements
– Capital Expenditures
= Total Disbursements
Net Cash = Total Sources – Total Disbursements

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