Importance of Cash Flows Cash Flows Summary for a Business

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Business managers, lenders, and investors, quite rightly, focus on cashflows. Cash inflows and outflows are the heartbeat of every business. So, we'll start with cash flows. For our example we'll use a midsize company that has been operating many years. This established business makes a profit regularly and, equally important, it keeps in good financial condition. It has a good credit rating; banks are willing to lend money to the company on very competitive terms. If the business needed more money for expansion, new investors would be willing to supply fresh capital to the business. None of this comes easy! It takes good management to make profit, to raise capital, and to stay out of financial trouble.

Exhibit A on the next page presents a summary of the company's cash inflows and outflows for its most recent year. Two different groups of cash flows are shown. First are the cash flows of making profit—cash inflows from sales and cash outflows for expenses. Second are the other cash inflows and outflows of the business—raising capital, investing capital, and distributing profit to its owners.

I assume you're fairly familiar with the cash inflows and outflows listed in Exhibit A—so, I'll be brief in describing each cash flow at this early point in the book:

• In the first group of cash flows, the business received money from selling products to its customers. It should be no surprise that this is the largest source of cash inflow, amounting to $10,225,000 during the year. Cash inflow from sales revenue is needed for paying expenses. The company paid $7,130,000 for manufacturing products sold to its customers; and, it had sizable cash outflows for operating expenses, interest on its debt (borrowed money), and income tax. The net result of these profit-making cash flows was a positive $540,807 for the year—which is an extremely important number that managers, lenders, and investors watch closely.

• In the second group of cash flows, notice first of all that the company raised additional capital during the year. Notes payable increased $175,000 from borrowing during the year; and, $50,000 was invested by stockholders (the owners of a corporation). On the other side of the ledger the business spent $750,000 for building improvements, machines, equipment, vehicles, and computers. And, the business distributed $200,000 to its stockholders from profit it earned during the year. The net result of the second group of cash flows was a negative $725,000 for the year, which is more than the cash flow from its profit-making operations for the year.

EXHIBIT A—SUMMARY OF CASH FLOWS DURING YEAR

Pdotlt-Moxing Cash Flows (Revenue mlJowj and Éïpcnsc OutHûws)

fwin customers tor producls sold to thém, some trim last year's saies $ 10H?î5r(M0

For manufacturing products that were sold, or ara stilt being hem for sals (7.Ï30.W0)

For many different expenses ol operating (1 ,S6 5.000)

for 'merest OR Short-teim and ¡Drtg-lOmi notes payable tse,133j

Ft* mew» tax, some of which was due ttn last year's ta*abte income (490.B5O) Mot cash increase thjnng year

Other Non-Profit Sources and Uses of Cash

Pnom twHûwina on interest-tearing noi« payaWe S 175,500

From issuing new c^prtat sloch (ownership» shares in the corporation M.OÛÛ

For building improvement machinery, &1c.. to be- used ¿¿vera] years {750,000}

For distribuions to stockholders from profit for the year __(jM.MO]

Net cash decrease dwirvg year

Net decrease In casfi (hiring year from all sources and Ltses

S54Q.S07

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