A by cathy.

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I am Cathy. I am a Certified Public Accountant and a business consultant for years. I want to share my expertise thru this blog which is intended to help people who are planning or who are already in business. The topics range from Accounting for Small Business, Cash Management, Inventory Management, Assets Management and Financing. The terminologies will be simplified for laymen and business jargons will be explained for clarity.

Saturday, December 29, 2007

Understanding Cash Flow Part 3

Sources of cash flow:

The major source of cash comes from the customers or clients. Either they are paid in cash/checks/or by credit cards. Some sales are on account which are known as *accounts receivables so that cash will only flow to the business when they're collected.

Cash can also come from the owner or owners. When cash is tight, the owners may increase their capitalization. This is not considered revenue but as increase in their equities.

The business may also borrow from the bank which proceeds can be credited to the account of the business. But these two types of transactions are not regular done by the business.

Where do these cash go?

They are used to pay *liabilities such as suppliers, utilities or loan amortizations.

Salaries also have to be paid regularly and taxes may be paid on a quarterly or monthly basis.

The owner or management must be able to forecast its cash requirements for the next succeeding months in order to control the receipts and the payments functions.

Too much receivable uncollected will not only contribute to low cash position but will also increase the risk of bad debts.

*Accounts Receivables-refer to sales made on account and are collectible at a certain period of time.
** Liabilities are accounts payable to vendors/suppliers or other agencies where services acquired are not yet paid.
*** Equities refer to the owner or partners or stockholders share in the business ownership.

Related Articles:

1. Understanding Cash Flow Part 1



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