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



Friday, December 28, 2007

Understanding Cash Flow Part 2

Many people equate cash flow with profit. This is not so. Profit is the accounting term for the difference between the revenues and the expenses. Expenses are not necessarily cash and revenues may not have been received yet such as receivables.

In small businesses, cash basis of accounting is preferably used i.e. only actual receipts are reported are revenues and only payments made in cash are deducted as expenses.

Let me illustrate:

For example a total sales of $ 5,000 has been made which is 2,500 cash and 2,500 in receivables. Expenses amounting to $ 3,000 was paid for the same period.

Using the cash basis of accounting, the business will report a loss of $ 500.

Cost and Expenses..........3,000.00
Net Loss................... 500.00

If the accrual basis is used, there will be a net profit of $ 2000 excluding non-cash expenses such as depreciation.

Cost and Expenses..........3,000.00
Net Profit.................2,000.00

What is the cash flow in this example. Cash flow amounted to $2,500 while net cash inflow is negative $ 500.00. Cash outflow refers to the expenses paid.

Related articles:

1. Understanding Cash Flow Part 1

2. Understanding Cash Flow Part 3



Wednesday, December 26, 2007

Understanding Cash Flow Part 1

Cash in the Bank

When I was working as an accountant, my boss asked me why we don't have cash in the bank while the business seems profitable.

He did not know that cash flow is different from profit or revenue; neither is cash in the bank is equivalent to cash position.

Even if the bank statement shows $15,000 balance at the end of the month, it does not necessarily mean that it is the amount available for business to use for payments.
Between the cut-off period of the bank's last entry item and the date when the cash balance is being determined, there are payments which checks are not yet presented in the bank for payment.

There may be loan proceeds that have been credited in the bank account and or there were charges that were debited from the bank's balance.

This is why a bank reconciliation is required at the end of the month to establish how much really is available for business as of the end of the previous month and is carried over at the beginning of the following month.

A simple proforma of a bank reconciliation is as follow:

Balance per bank ..................... XXX
Add Deposit in Transit*............ XXX
Less Outstanding Checks**...... ( XXX)
Adjusted balance per bank.....XXX

Balance per books.................. XXX
Add Bank Credits***...............XXX
Less Bank Debits****..............(XXX)
Adjust balance per bank......XXX

*Deposit in Transit are deposits made at the end of business day after the cut -off period of the bank statement.
**Outstanding checks are checks which disbursements have already been recorded in the books but payments are not yet made by the bank.

*** Bank credits refer to additions made by the bank to your account such as collections from your on-line payments remitted directly to the bank; loan proceeds and other adjustments that will increase the balance which are not yet recorded in the books.
**** Bank debits are deductions from your account such as bank charges.

Related Articles:

1. Understanding Cash Flow Part 2

2. Understanding Cash Flow Part 3