Managing Cash Flow

Cash Flow Basics 15
FROM CASH TO CASH … AS QUICKLY
AS POSSIBLE.
This is the process for a manufacturing business. A service business, a retail
store, or even a not-for-profit organization goes through the same series of activities.
The only adjustment is that the descriptors will be different. A retail store will
purchase inventory, but will not do any manufacturing; instead, it will incur merchandising
costs to make the items available for sale in an appealing manner. A
service or not-for-profit establishment may not purchase inventory or do any
manufacturing but will have to incur costs to ready the services for their clients’
benefit. In any business, cash will have to be expended prior to receiving a return
from customers or clients. Having sufficient cash available to allow that to happen
is essential to both short-term survival and long-term success.
A business starts with cash—the owner’s investment and usually some borrowed
funds. The purchase of goods or services, together with the manufacturing
activities or service provision, transforms the cash into inventory or services to be
delivered. As the goods or services are provided to the customer, they are converted
to accounts receivable or cash receipts. The collection process then transforms
the accounts receivable back into cash. If the business process works
properly, the cash received is greater than the cash laid out, and the resulting
excess provides the business with additional funds to reinvest and grow. The
process then needs to repeat itself in an ever-increasing continuous cycle. A major
Cash
Collections
Purchasing
Accounts
Receivable
Purchased
Material
Sales
Manufacturing
Inventory
– as slowly as possible
– as quickly as possible
Exhibit 1.2
Cash Generation Cycle