Cash Flow vs. Cash Savings
Original post by Eric Feigenbaum of Demand Media
Businesses, like people, have bills to pay and costs to manage. These require income -- which businesses account for in two forms: accounts receivable and cash flows. Accounts receivable is the money "on the books" -- money clients and customers owe a company for services rendered or goods received. Cash flow is the actual money received by a company. Ideally, cash flows should match total revenues earned, but many businesses face a gap. Meanwhile, cash savings is the amount of money a company puts away for a rainy day -- perhaps to fund capital improvements or to ease financial strains.
Some businesses have steady cash flows and rarely worry about unpaid bills. For example, retail businesses receive payment in full with each sale -- cash flow virtually always matches total revenues. However, in many lines and industries including law, staffing and health care, businesses essentially issue lines of credit to their customers and clients -- providing goods and services and then invoicing or billing them after the fact. Organizations that bill can find themselves with a much higher recorded revenue than cash flow, which can mean a business that looks successful on paper has trouble paying its bills.
Companies concerned about maintaining their cash flow often have to focus on the ugly business of collections. Clients late on paying their bills and invoices sometimes need reminders and payment plans. Occasionally, legal threats may be necessary to get a particularly delinquent client or customer to pay. Although neither company nor client care for this process, ensuring that accounts receivable turn to cash is essential for a business' health.
When cash flows and profits are good, many smart business owners and executives begin thinking about how to position their organizations for tougher times. Storing money in savings or even investments such as bonds and money market funds gives businesses security and the means to access their money quickly when needed.
Uses of Savings
Keeping cash reserves can help a company maintain its payroll, make capital purchases and handle unexpected costs such as lawsuits and other liabilities. Companies that rely on technology they know will evolve and change create funds for inevitable capital investments. Similarly, cash savings can allow companies to take on unplanned projects as opportunities arise, including acquisitions, new buildings and investments in other businesses.
- "Inc."; How to Manage Cash Flow
- "Inc."; Accounts Receivable
- "The Economist"; The Corporate Savings Glut; July 7, 2005
- Small Business Administration: Accounts Receiveable Spreadsheet Model
- University of Colorado: Corporate Cash Savings - Precaution vs. Liquidity; Martin Boileau et al.; December 2009
About the Author
Eric Feigenbaum started his career in print journalism, becoming editor-in-chief of "The Daily" of the University of Washington during college and afterward working at two major newspapers. He later did many print and Web projects including re-brandings for major companies and catalog production.
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