Quantcast
Channel: ViewForward Business Advisors Blog » Business Effectiveness
Viewing all articles
Browse latest Browse all 9

Cash Flow for Visual Thinkers

0
0

Worcester Business Coach Cash Flow for Visual ThinkersIf you are like most business owners you know that cash flow is important and you wish you understood it better.  We all know what cash is because it is real; we can hold it in our hands.  Understanding cash flow is a bit more challenging for most people.  For all you visual thinkers out there, I hope you find this graphical explanation of cash flow helpful.

I realize that at first glance this diagram looks pretty complicated but please bear with me as I walk you through it.

Worcester Business Coach Cash Flow For Visual Thinkers

The diagram is meant to show you, visually, all the material and cash flows in your company.  Rectangles represent balance sheet accounts and the circles represent physical actions taken by your company.  You can think of each rectangle as a reservoir filled to a certain level at any point in time such as the date on a balance sheet.  As you go about your business, every action you take causes the levels in these reservoirs to rise and fall.  Since this post is about cash flow, we will be focusing in on the big blue reservoir labeled “cash” at the bottom-center of the diagram.

Take a look at the cash reservoir.  You will notice that there are 12 “pipes” connected to it.  There are four input pipes, shown as blue lines, adding cash and filling up the reservoir; and eight output pipes taking cash away and drawing down the level of the reservoir.  When you consider the sheer number of pipes involved it’s really no wonder that cash flow is difficult to fully understand.

Let’s start with the four (blue) cash input pipes.  When you sell something for cash and your customer actually hands you their money, cash flows through the ”Cash Sales” pipe on the left side of the diagram and the level in the cash reservoir increases.  When you sell something on credit your customer essentially gives you an IOU and nothing happens to the cash reservoir right away.  Those IOUs flow through the “Credit Sales” pipeline causing the level in the accounts receivable reservoir to increase.  At some point in the future you will send your credit customer an invoice, and their payment of the invoice is represented by cash flowing through the “Collections” pipe and raising the level in the cash reservoir.

If your company is growing, and you are projecting a large increase in sales volume, you might want to have more inventory on hand.   This takes cash!  If your cash reservoir is full enough you can use some of that cash to purchase more raw materials and hire more people to produce more products to satisfy the increase in customer demand.  If, on the other hand, your cash reservoir is nearly empty you will need to need to raise cash.  You might do that by borrowing money from a bank for example.  That is represented by cash flowing through the “Borrow” pipeline (lower right) and raising the level in the cash reservoir.  The other option is raise cash by issuing stock in your company.  In that case cash would flow through the “Stock Issues” pipeline (lower left), again increasing the level of cash in the reservoir.

In my next blog post I will cover the eight pipes flowing out of the cash reservoir.  From there, future posts will rely on the diagram to explain cash management, cash budgeting, and the relationship between cash flow and profit.

Stay tuned!

If you would like to talk about your cash flow please feel free to contact me at rdavis@viewforwardadvisors.com or via phone at (978) 407-8799.

Diagram source: Brigham, Eugene F., Gapenski, Louis C. Financial Management. New York, NY. The Dryden Press, 1988.


Viewing all articles
Browse latest Browse all 9

Latest Images

Trending Articles





Latest Images