Managers of small businesses who are concerned about the way their funds are received and spent need to understand the concept of the cash flow. Cash flow can be defined as the inward and outward movement of the funds of a business. The financial stability of a small business is determined by the movement of cash outflows and cash inflows.
Furthermore, cash flow analysis is the study of the cycle of the business' cash inflow and outflow. Its main purpose is to maintain an adequate cash flow for the small business, and to set the foundation for the management of cash flow. The analysis of a small business’ cash flow involves studying the business components which have a major effect on the movement of cash. Such components include accounts receivable, accounts payable, credit terms, and inventory.
In addition, analyzing the cash flow on the said components will give certain benefits to the business. Through cash flow analysis, owners of small businesses will easily identify possible problems in the movement of cash. They can then find ways to solve and improve it. Moreover, the crucial information which comes from the results of this analysis cannot always be seen in the balance sheet or the income statement of a small business.
As a final note, a simple and fast way to do an analysis of a small business’ cash flow is by comparing the total cost of purchases that are unpaid to the total amount of sales that are due on or before the end of every month.
