Transcript Financial Analysis LAP 6 Objectives Describe the importance of cash flow. Describe the components of a cash flow statement. Objective Describe the importance of cash flow. • When.

Financial Analysis
LAP 6
Objectives
Describe the importance of cash flow.
Describe the components of a cash
flow statement.
Objective
Describe the importance of cash flow.
• When you owe more money than
you have–
 Your cash flow is out of balance.
 You may not be able to pay all of
your bills.
 You may need to borrow money from
a family member or a friend.
 Not a situation you want to be in
very often
• Businesses sometimes are in the
same situation.
 Businesses monitor their cash flow
to avoid this problem.
Importance of Cash Flow
• Cash—it makes the world go
around.
• Businesses need cash to operate.
• Need to manage their cash flow:
 The movement of funds into
and out of a business
 Determine the amount of
cash they have to work with
at any given time
Cash Flows Into a Business
From Five Main Sources
• Start-up money
• Sale of products
• Loans
• Interest
• Sale of assets
Main Sources of Cash Flowing
Out of a Business
• Operating expenses
• Cost of goods sold
• Assets
• Loan payments
• Taxes
• Miscellaneous
Monitor Cash Flow
To build a cash surplus when
sales are up
• Creates a safety net for the
slow time
• Keeps the cash flow
balanced
Objective
Describe the components of a
cash flow statement.
Cash Flow Statement
• Best guess, or estimate, as to when,
where, and how much money will
flow into and out of the business
• Tells the business–
 When money will flow in
 Where money will flow in from
 How much money will flow in
Finding Necessary Information
• May be a problem for new businesses
 Do not have previous financial data
 Often rely on figures obtained through marketing
research
• Existing businesses have financial information.
 Review previous profit-and-loss statements.
 Analyze industry trends and predictions.
Components of a
Cash Flow Statement
• Cash
Beginning
payments
cash balance
 Sources
of cash at
flowing
out of theof
Money available
the beginning
business
each month
• Total
paid out
Cash cash
receipts
 Determined
by adding
all offlowing
a
Specific sources
of money
business’s
cash payments
into the business
• Ending
cash
balance
Total cash
receipts
 All
Cash
business
left at the
end
of a
the
sourceshas
of income
listed
of
the month
under
cash receipts
• Total cash available
 Cash available to spend each month
What This Means
• Gives
Indicates
a business
the financial
a good
condition
idea of
amount
of
a business
of money that will flow in
and
out
 Businesses
with extra cash are able


to
invest.cash flow means there is
Positive
Investments
lead
growth
and
enough money
ontohand
to meet
expansion.
monthly obligations.
 Negative
This generates
more
sales the
and
cash flow
means
more
cash.
business
will need to obtain
to continue
 additional
Result is amoney
prosperous
business
operating.
that has cash to continue growing.
Steps to managing your cash flow
• List all of your income for the month.
• List all of your expenses, even the small ones.
• Total the amounts on each list.
• Income should be more than expenses.
• If not, there are two options:
 Reduce your expenses.
 Find a way to bring in more income.
Businesses often use cash flow statements to obtain credit.
• What
Was itifworth
it to be less
than
they present
information
in a
completely
truthful?
way that is legal
but not quite ethical?
Was there
another
tobut
be ethical
• What
if they
get theway
loan,
the bank
and
get the loan?
findsstill
out?
 Bank might not trust the business in
the future.
 May always be concerns about
accuracy of financial information
 Business might have trouble getting
other loans.
MarkED
Acknowledgments
Original Developers
Christopher C. Burke,
Lynn Malowney, MarkED
Version 1.0
Copyright © 2007
MarkED Resource Center
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