Starting their business, most organizations expect to quickly receive income from sales of goods or services offered. It often happens that people involved in managing and distributing funds do not take into account that a good turnover of goods and services in a short period is necessary to obtain free funds.
What is the company's cash flow ?
For a well-coordinated, profitable work, the company requires cash investments. Payments for goods, services and assets used can be carried out both in cash and non-cash. The term "company cash flow" means the totality of all methods of making profit: payments for goods, settlements on credit obligations, as well as payments to employees and shareholders.
Cash payments are made using available money.
Non-cash payment is carried out using a turnover of non-cash funds at the request of the recipient from the payer's account for presentation of a negotiable document.
Types of cash turnover
A company’s turnover is a set of processes necessary to increase turnover. For this, various interaction methods can be used to calculate for goods, services or materials received:
- Cash settlement (used in the interaction of legal entities and individuals to pay bills for goods received, services for non-merchandise obligations).
- Monetary turnover (applicable for the provision of services or goods on credit).
- Monetary and financial turnover (characteristic of material relations between the customer and the contractor).
Who can become a member of the cash flow?
The company's turnover is the interaction between organizations involved in cash flow. These are cash flows between legal entities, banking institutions, a bank and legal or physical persons, between individuals.
Most often, such interactions occur by bank transfer between the customer and contractor accounts.
Thus, the company's cash turnover is the sum of all revenues for goods and services produced , as well as deductions for consumed electricity, rental of premises, purchase of raw materials, for settlement with shareholders.
Accounting keeps track of the revenues and costs of production for the entire life of the company. Based on this, all the material assets of the enterprise can be divided into active and passive assets, which play a significant role in the company's turnover. This is proved by the fact that the younger the company, the less it will have inactive assets.
What are enterprise assets?
The assets of the enterprise are formed as a result of the work of the company and are divided into:
- Active (cash in constant circulation used for the purchase of raw materials, payment for current payments).
- Inactive (do not carry material burden and cannot be useful if necessary to improve the financial condition of the company).
If active assets appear through production, sale, receipt of payments on debts, prepayment of the customer, as well as interest rates on long-term investments, then inactive funds are most often already on the balance sheet of the company at the beginning of its production activities.
Workers see most of the inactive means on a daily basis - these are work buildings, machinery, any intellectual property that is not used in the production process, but which appear in the process of legal activity (client base, reputation, partnerships, etc.)
What affects cash flow?
A company’s turnover is a combination of assets and tangible assets in circulation in a certain period. Each organization should monitor the need for working capital, since it plays a significant role in optimizing work and production costs.
The company is gaining momentum and increasing the margin ratio, that is, the amount of net revenue remaining after payment of all debt obligations, payments. But it cannot be said that gross margin is an accurate indicator of a firm's well-being.
The margin ratio can show only the amount of net profit that the organization can spend on its needs in the current month. Accordingly, a company that increases this indicator at high speeds has a short turnaround time for goods (goods-buyer-money), as well as a stock of raw materials that is constantly in circulation.
Thanks to miscalculations, an experienced economist can say for sure whether the company's turnover is sufficient and whether the enterprise is liquid. Namely, how quickly the roundabout of active funds and materials takes place, and whether the company will be able to pay off existing obligations to creditors and stay with net income.