For those just starting out in business, cash flow is a fairly new concept. However, this is a concept that shop/business owners should learn because it will stick with you for the rest of your business life.

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Table of contents

4 All about cash flow in financial statements7 So how to manage cash flow effectively?10 How to calculate net cash flow in business

What is cash flow?

Cash Flow is understood as the movement of money in and out of money (ie received and spent) in a shop, business, project or financial product.

For example: When a customer buys a shirt at a shop and pays, that amount is cash inflow. When you import goods, pay electricity and water bills… that’s cash out.

The goal of small businesses/stores is to create a positive cash flow (Positive Cash Flow), that is, how to receive more money in than spend money. This sounds easy and simple, but a lot of companies have problems with their cash flow. If the revenue is not stable, the payment of daily expenses such as salary, electricity, water… also faces many difficulties. Many businesses generate negative cash flow (Negative Cash Flow), which means they spend more than they receive. It could be because the goods are difficult to sell in that season or they are investing more in the business…

Keeping cash flow positive is a great thing for small businesses. And to report their cash flow situation, businesses will create a cash flow statement.

What is a cash flow statement

?Cash Flow Statement is a statement of the change in cash flow in a business/store (First Cash Amount) investment, money out, money in, cash now… usually the company needs to prepare a cash flow statement every month or every quarter to understand its cash flow situation.

A cash flow statement consists of three main parts:

Cash Flow from Sales Cash Flows from Investing Cash Flows from Finance

You can view a sample cash flow statement here

Difference between cash flow and profit

Cash flow and interest are two related but different concepts.

Net Cash Flow = Cash Inflow – Cash Outflow

Profit = revenue – Expenses

Many people will immediately ask “Well, what is the difference” because they think that cash inflow is also revenue and cash outflow as well as expenses. But the truth is not so. If you have a profit minus capital, you may not have cash (for example, if you sell debt), having cash is not necessarily profitable. Easy and simple example.

You open a commodity shop, after that, you have 300 million remaining capital. The first month you made 10 million in sales. My friend saw that your business was profitable, so he immediately invested another 200 million for you. So here Cash Inflow = 200 + 10 = 210 million. Meanwhile, your income is only 10 million only.

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All about cash flows in financial statements

Cash flow statement, also known as cash flow statement, is a type in a company’s financial statements that shows the movement of cash flows over a certain time frame as required by management on a monthly basis, quarter or year.

The statement of cash flows includes:

– Cash flows from business activities: Includes receipts and expenditures from sales and service provision, payments to employees, interest payments, and other receipts and expenditures related to sales activities.

– Cash flow from investment activities: including expenditures on asset purchase, completion of assets, loan payments, capital contribution to other entities, loan recovery, return on capital contribution, interest income loans, dividends and interest received.

– Cash flow from financial activities: Including capital contribution or return of contributed capital, collection of borrowed money, repayment of loan principal, interest dividends compared to capital paid to owners.

Cash saving report

Distinguish between net cash flow and interest minus capital

Net cash flow and interest are concepts that are easily confused.

Formula for calculating net cash flow and profit:

Net Cash Flow = £Cash Inflows – £Cash Outs Profits on Equity = £Revenue – £Expenses

To best understand their difference, please refer to the following example

At the clothing store opened in July 2019, capital contribution is VND 100 million, revenue from business is VND 20 million, payment for purchases is VND 50 million, other expenses are VND 20 million. .

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Net cash flow = Capital contribution 100 million + business income 20 million – purchase expenses 50 million – other expenses 20 million = 50 million Profit = Sales revenue 20 million – import costs 50 million – other expenses 20 million = – 50 million

Calculate cash flow and return on capital

Causes of weak net cash flow

There are quite a few reasons for the weakening of net cash flow:

– Due to the failure to build a budget project, an ideal spending project, leading to arbitrary spending, non-project spending while cash revenue does not improve, leading to negative cash flow. For example, this month your sales have increased significantly, leading to you making an unplanned decision to invest in 2 more air conditioners for the store. This incurred expense is not on the plan, and then the revenue is not as expected, other expenses are still expected to be paid and your cash flow will be negative.

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– Due to weak financial management. Today’s self-discovered bosses and mistresses often do not have in-depth knowledge of financial management, leading to financial imbalances that do not know how to remove them. Only chasing after profits without paying attention to other issues such as debt recovery ability, the danger of bad debts, etc., the reason for the store’s income may be very high but the money does not come back.

The role of cash flow management for each company

In 2008, Washington Mutual Bank – one of the famous US banks was forced to go bankrupt because of mistakes in cash flow management. This is considered by the US financial community as one of the largest bank failures in history. During the storm of the financial crisis, the bankruptcy of Lehman Brothers and the collapse of a series of giants caused customers to massively withdraw money from Washington Mutual Bank (9% of deposits), leading to no longer liquidity. . The quantity and speed of cash outflow at that time made it impossible for the bank to find new sources of capital and improve liquidity.

Stock trading chart of Washington Mutual, Inc

The cash flow lesson from the failure of the Washington Mutal Bank is that “cash is a waste in a bull market, but cash is king in tough times.” Businesses need to always have enough liquidity to provide contingencies and expenses for unexpected events.

Playing an important role in each work of each company, basically cash flow management helps businesses to:

Control, increase the amount and speed of cash inflow; Minimize amount, speed cash out. Design effective loan/payment plan, increase credit with banks, investors and suppliers. Make the most of cost reduction opportunities such as % purchase commissions or simplify operating and production costs. Most effective use of cash when available. Provide finance to expand and grow the business Increase employee engagement when there are bonuses and investments. infrastructure and pay wages on time.

So how to effectively manage cash flow?

According to the summary from the shares of key CFOs in the US, there are 3 things to pay attention to for effective cash flow management:

Always have a cash flow forecast:

Arrange your forecast for your business’ cash flow next year, next quarter, or maybe, if you’re in a special situation, every week. Accurate cash flow forecasts can help a company sort out problems before they happen.

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A complete cash flow forecast is a combination of components including: payment history of customers, partners; The direction of upcoming expenditures and the understanding to envision possible problems on the supply side of a smart manager. Make predictions about delayed receivables or non-renewable accounts payable. Managers also need to make sure they don’t ignore fixed costs, including rent, imports, wages and taxes, benefits, equipment, and advertising. ,,…

Improve accounts receivable

As mentioned at the beginning, if the company was paid immediately after the sale of goods, cash flow management would become a much easier matter. Unfortunately, the reality is not so good, so improving accounts receivable remains one of the significant problems in cash flow management. The most basic strategy for this is: Improve the speed at which the company turns materials into products; Turn inventory into accounts receivable and turn receivables into cash. Following are a few techniques to do this:

• Provide discounts for customers and partners to pay bills more quickly. • Ask customers and partner companies to pay for goods at the time of ordering as much as possible. • Get rid of old, defective, and obsolete inventory with anything that the business can receive. • Track and have a suitable mechanism for late paying customers and partner companies.

Manage Accounts Payable

The rapid growth of earnings sometimes blinded managers. Especially with growing businesses, whenever they see expenses growing faster than normal income, managers need to carefully examine them to find the right way to cut or control them. Here are a few minor caveats:

• Make the most of the payment terms of creditors, banks, distributors. If the payment is due in 30 days, don’t pay it for 15 days. Please make the payment on the last due date. enterprises will still maintain good cooperative relations with creditors and banks while maintaining efficient use of money • Close contact with suppliers so that they understand the financial position of the business. If the company needs to extend the payment, their trustworthiness and understanding is one of the most necessary conditions.

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• Look carefully at your distributor’s promotional offer for early payments. It could be because your supplier owes a large amount to pay quickly, or they may be on a recommendation. you change to reduce their overall costs.• Don’t always focus on the lowest price when choosing a supply. Sometimes more flexible payment terms can completely bring the business more profit than capital..