Small Business Cash Flow
Financial data and cash flows in particular, help modern organizations to control financial performance of all departments and foreshadow changes. The cash-flow management system can help companies to regulate the amount of cash held by an organization. In management and accounting, the term “cash flow” is used broadly to represent funds provided by different operations and financial activities . The structure of the cash flow system is as follows. When the system is at equilibrium, the amount of cash inflow should be equal to the amount of cash outflow, and the cash netflow (difference between cash inflow and cash outflow) is zero. In this simple system the sales are at a certain level and stable (this can, in this simple setting, be inferred from the constant cash inflow condition) as are the total cash on hand and current liabilities. In this basic example, with stable cash on hand, the level of current assets will remain unchanged. Both stable current assets and current liabilities implies that the current ratio is steady, so are the health and cash payment rate, i.e. the system would be in equilibrium . Cash, credit and inventory are three main elements of current assets. Reasoning qualitatively, and not knowing the exact rate of increase of current assets to cash on hand, this state of incomplete knowledge can be expressed more exactly, but still in a qualitative way, as some unspecified, but monotonically increasing function relating cash on hand to current assets .
The effect of cash flow statement is that it indicates overall health of the organization and its financial position. Researchers (Bragg 2007; Mulford, 2006) admit that the ratio of current assets to current liabilities, is one of the ratios frequently used in analyzing the level of the cash payment rate. An oft-quoted standard for this ratio is that it should be held at a value not less than 2: 1 . A declining trend in this ratio indicates that the company is becoming short of cash relative to its current liability payment requirements and may have difficulty in meeting its current obligations. In order to avoid a zero cash balance, it is necessary to reduce the level of the cash payment rate. Further, the rate at which cash is used to pay liabilities is constrained by the level of liabilities and by management’s policy concerning maintenance of a satisfactory current ratio. The amount of cash on hand has a direct influence on the level of Current-ratio .
By combining all these qualitative constraints, along with their corresponding values and the quantity space of each parameter, the organization can derive the complete description of the qualitative structure of the cash-flow management system. In general, cash flow statements are both organizing and control mechanisms that, although essential to control (particularly cost control), serve as a balance between planning and control.
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