Cash flow follows two basic logical steps—cash flows in, cash flows out. We recently needed to explain this to a business plan client in Atlanta.
Cash flows in from a few different sources. Generally it comes in the way of income from sales and services. In this case, the cash flow lines should be tied directly to the sales forecast of your business plan. Depending on whether you sell any of your goods on credit helps determine whether or not cash hits the cash flow statement now or later. If you take payments, then the receivables hit the balance sheet and the cash when the payment is made. Other things that flow in through cash flow are investing activities and loans. In investing activities, the company may take on a new investor or partnership. When that person pays in, it generally hits the cash flow table as well as balance sheet paid in capital. When a new loan is taken, the cash hits the cash flow table and the debt hits the balance sheet as a new long term liability.
Also, cash flows out through the payment of bills and expenses, as well as when purchasing inventory. This is where inventory turn days become important. If you buy a widget on the first but don't sell it until the 15th, and then you sell it on credit, it's possible that you won't recoup the cash for this outlay for more than 30 days. This is where it's important to have adequate cash balances to support your inventory turn and accounts receivable. Cash also goes out in the form of principal payments back to the loans the business has. Only the principle is on the cash flow statement, the rest of the payment is reflected in the accounts payable as interest expenses carried over from the profit and loss. Last, dividend payment to investors can also be reflected here on the cash flow.
Have questions? Please contact us for help structuring a proper cash flow statement for a business plan written in Atlanta or anywhere.