By Elizabeth Ortiz
Published: June 2020

One of our business’s essential values is making sure our clients have all the tools and information they need to ensure the financial success and growth of their businesses.

Sometimes those tools come in the form of software, like our Quickbooks Training service. Other times, the benefit we deliver is in helping our clients understand the “financial picture” of the business.

corporate cash flow

When you can understand your business’ finances the way we do, it empowers you to make better, more precise decisions. It allows you to focus on your core objectives. It also drives you to think strategically about growth.

Understanding corporate cash flow is essential for the business owner. One of the reasons the topic is important to us is that it spans all of our services. There are elements of corporate cash flow in accounting, bookkeeping, and strategic business development.

Our clients appreciate the benefit of our holistic approach to business services. So, let’s cover the four things you need to know about corporate cash flow.

What is Corporate Cash Flow?

It’s always good to start by defining what it is you are talking about.

Put in the most simple terms, cash flow, or the flow of cash into and out of the company, compares the cash inflows and the cash outflows of an organization.

Cash inflows are the stream of money that comes into a company. Many sources contribute to cash inflows; the most common is from selling products and services to customers. This is the money that is collected in exchange for the services or goods. Cash inflows can also come from other sources and business activities.

This cash generated might come from investors, or there could be cash flow from investing. The sale of property or intellectual assets could also generate cash inflows.

Cash outflows occur when an organization transfers money out of the organization. The amount of cash is dependent on the financial needs of the situation. Cash outflows are typically payments made to employees, suppliers, and creditors.

And like cash inflows, there are other outflows of cash that are considered, like the cash to purchase strategic assets and investments; or to pay for professional services such as legal work and proceedings. It’s essential to note that, generally, when a company pays for something with credit, that is not considered a cash outflow until the company has fulfilled its financial obligation to the creditor.

So, when doing a cash flow analysis, we compare the net change in cash by comparing the positive cash flows with the cash outflows. A report called a cash flow statement would reveal of the business has a positive cash flow, they took in more than they paid out, or negative cash flow, they paid out more than they collected.

Cash flow is not the same as income.

There is an important distinction and differentiation between cash flow and net income. When you understand this, you will value the importance of measuring both in your business.

Cash flow is the measurement of money that comes into and flows out of an organization. Net income or profit is the amount of money that is left after all calculations are made. Net income is the “bottom line” and could be a positive or negative number.

In fact, a company could have positive cash flow; they are taking in more money than they are spending, and still have a negative net income.

In many cases, net income might include non-cash expenses like depreciation of assets, bad debt expense, and other items. These expenses affect the net income but do not modify the cash inflow of a company.

The smart business owner realizes that it is vital to understand both cash flow and net income. Observing how the two affect each other is an essential task in gauging the financial health of your business.

Scrutinizing will expose inefficiencies.

There’s a story that is told of a New Zealand corporate raider who had taken ownership of a business. One of his first tasks was to examine the cash flow statement. He did this to get an idea for a starting point to turn the failing business around.

When looking through the statement, he found a cash outflow of $250K (New Zealand dollars) that was sponsoring a giraffe at a local zoo.

Now, everyone can agree that sponsorships and benevolence are essential activities for a company, but when a company is failing, $250K can go a long way.

The giraffe sponsorship was canceled, and the investor coined the phrase, “there’s always a giraffe.”

It would be best if you examine your cash flow statements monthly. Enlist the help of a professional to find the inefficiencies.

Carefully make decisions based on the relationship between cash flow and net profit. In essence, find the giraffe.

Having a professional review lets you focus on what’s most important.

Corporate cash flow and net profit are complex elements of the financial picture of a company. There are many moving parts, and one error can have lasting and far-reaching effects.

But you do not have to go at this alone.

Working with a professional to review your entire set of financial books will help ensure that everything is being done correctly.

Further, a professional can quickly find and resolve problems.

When you have an accounting professional by your side, your corporate cash flow becomes easier to understand. That understanding can help you focus on what’s most important, the growth of your company.

We welcome the opportunity to work with you on getting your corporate cash flow organized. Our customized services can provide as much or as little assistance as you need to be successful in your business. And at the end of the day, our goal is to make sure you are successful.

Feel free to reach out to us and schedule a no-obligation, free consultation.