Business accounting tracks all of the elements that move into, through and out of a company. While some of these elements take the form of materials and labor, others are monetary assets and liabilities such as cash and loan debt. One of a business's most important financial statements for managing day-to-day operations is a cash flow statement. Cash flow is subject to variables that impact a business's financial health.
Cash Flow Basics
Cash flow refers to the rates at which cash enters and leaves a business. It does not include other assets, including those with clear monetary value. Accountants measure cash flow for different periods of time, including weeks, months, quarters and years. For example, quarterly cash flow refers to the cash a business takes in and the cash it pays out in a defined three-month period. Cash flow can be difficult to predict due to the changing nature of the factors that control revenue and expenditures.
Sales is one of the most prominent variables that affects cash flow. Most businesses receive the majority of their revenue from selling goods or services. However, sales rates also tend to vary seasonally or over time as a business introduces new products and changes its pricing structure. Sales is also a variable for cash flow because customers pay at different times. Some customers, such as large retailers, may pay for product orders in installments. This means that the business receives payment well after incurring the expense of producing goods. Other sales, such as online orders from customers using credit cards, result in immediate payment, delivering cash to the business quickly.
Expenses are another major variable in defining cash flow. While sales represent the money that flows into a business, expenses are the necessary payments that cause money to flow out. Expenses include things such as payroll, which rises as a business adds workers or existing workers receive wage raises. Variations in the price of raw materials, marketing and insurance also impact how quickly money leaves a business. Cash flow management relies on keeping expenses under control or being able to postpone expenses while waiting for more cash to flow in.
Interest and Investments
Interest can be another form of revenue, like sales, or an expense. In either case, it affects a business's cash flow. Interest is part of revenue when it takes the form of interest a business earns on its investments. This interest is subject to change with the market. For example, the money a business receives as interest on its cash savings changes as the bank's rates change. Businesses also borrow money, which requires them to pay interest as an expense. Adjustable rate loans result in variable interest payments, which require different amounts of cash to be paid out in each billing period.