Cash flow is the funds that are wont to manage the day-to-day operations of a corporation. These are the funds that are flowing in and out of your company in a month. Even though it does seem sometimes that income works only in a method i.e. out of the business but it does flow both ways.
Cash Flow Statement – may be a summary of cash coming into and going out of the business during a group period of time. The income statement answers the questions – Where did the enterprise’s cash come from and where did it go/get spent?, the Cash Flow Statement is not part of the accounting/bookkeeping process but is made up of a compilation of them both. You will also need the previous period’s Balance Sheet to accurately complete a Cash Flow Statement.
The cash flows in and out of the enterprise are divided into three main categories in the Cash Flow Statement.
Operating activities – These are the day-to-day activities and include the buying and selling of products and services.
Investing activities – These are the investments within the future activities of the enterprise e.g. buying and selling fixed assets.
Financing activities – These entries report on how the enterprise
When this situation occurs where financial obligations are not met, the following can happen which will eventually lead to system failure and business crashes:
Corporate law – The law in Australia and other countries don’t require a business to be profitable but it does make it illegal to continue trading the business while it is in an insolvent position (no cash flow).
Loan repayment – the day you don’t have sufficient cash flow to pay your loan repayment obligation, your loan is in default which may provide triggers for your funders to take legal actions against you which may ultimately give them the legal right to wind up your business
Payroll – the day you don’t have sufficient cash flow to pay your payroll, your best staff, who can get a job anywhere, start planning to leave. Losing your best staff could also be the start of the top for your business.
Supplier credit – the day you don’t have sufficient cash flow to pay your supplier accounts, your suppliers become nervous about their exposure to your business and may restrict granting you further credit forcing you to pay cash for vital supplies … cash that you may not have.
Short-term decision making – the day you don’t have sufficient cash flow to pay your financial obligations is the day that you begin making short-term decisions (giving discounts and not spending on vital goods/services) which may just put in jeopardy the long-term viability of your business.