My current company deals with the buying and selling of home appliances. Orders are made online and we deliver the products. For this kind of company, cash generation is very important. This is because the whole business depends of the cash to operate. Customers buy the products and that money is used to purchase more inventories. Without the generation of cash, the business will fall. The business will not be able to purchase more inventories and thus will be unable to meet demand.

Cash generation is totally different from the idea of profit and loss (P&L). P& L is all about the profits and losses made. For example if in my current company I manage to sell all the products on credit, the sales will appear in the P& L statement. However, there is no liquid cash received from these sales transactions. There will thus be no entry in the cash flow statement. The P& L may indicate that the company has made a profit but there is no cash to meet the immediate financial obligations (QuickBooks, 2014). The P& L helps the company to know whether it is making a loss or a profit and adjust accordingly. The cash flow statement on the other hand allows the company to know whether it can be able to meet its immediate financial obligations.

A company can manage the cash flow by minimizing the debtors. When only a few people buy on credit, the company will have enough cash (Tarver, 2015). Another way is by having a contingency plan in place. This will ensure that the company never lacks liquid cash to cater for the immediate obligations.  The plan can be a loan, asset liquidation or money set aside for that purpose.

Reference

10 Tips for Better Managing Cash Flow | QuickBooks. (2014). Retrieved May 23, 2016, from http://quickbooks.intuit.com/r/financial-management/10-tips-managing-cash-flow/

Tarver, E. (2015, November 12). What is the difference between a cash flow statement and an income statement? | Investopedia. Retrieved May 25, 2016, from http://www.investopedia.com/ask/answers/031215/what-difference-between-cash-flow-statement-and-income-statement.asp

Response to Jacob Hartlage

Hi Jacob, thoughtful view over there, Cash is really King; no company can operate without cash to meet its immediate financial obligations. I tend to disagree with you that when you lease truck money is not spent. Money is still spent but at a low proportion. The difference between buying and leasing is that in buying you spend a lot of money at once but in leasing you spend little by little (QuickBooks, 2014). Leasing is helpful when a company has less cash flow.

The P& L just shows whether the company is making a loss or a profit to help in the decision making but the cash flow shows whether the company has enough cash to cover the immediate financial obligations (Tarver, 2015). Companies should always manage the cash flow to ensure there is enough cash always to meet cash demands. Alternatively, a company can have a contingency plan to be executed when things run out of hand.

Reference

10 Tips for Better Managing Cash Flow | QuickBooks. (2014). Retrieved May 23, 2016, from http://quickbooks.intuit.com/r/financial-management/10-tips-managing-cash-flow/

Tarver, E. (2015, November 12). What is the difference between a cash flow statement and an income statement? | Investopedia. Retrieved May 25, 2016, from http://www.investopedia.com/ask/answers/031215/what-difference-between-cash-flow-statement-and-income-statement.asp

Response Amanda Gifford

Hi Amanda, nice piece of work, your current employer depends on cash to cover the employee wages. For my business, I depend on the cash to keep the inventory running. I use the cash from the customers to buy new appliances to sell. Take for example if both of our companies have no money, your company can be able to manage for some days since it actually requires a lot of money at end month.

For my company it would mean that I will not buy new inventories thus failing to meet demand and generating more profits. The P&L for both companies can generate a profit but as you can see I will be in more trouble. The P&L is just shows whether the company is making profits or losses for decision making (QuickBooks, 2014). Both the P&L and cash flow are important for the running of a company when it comes to cash; cash flow is the most important. It shows whether the company can be able to cove the immediate expenses.

Reference

Tarver, E. (2015, November 12). What is the difference between a cash flow statement and an income statement? | Investopedia. Retrieved May 25, 2016, from http://www.investopedia.com/ask/answers/031215/what-difference-between-cash-flow-statement-and-income-statement.asp

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