Introduction to Cash Flow

This week in our accounting basics series we're starting with receivables. Towards the end of next week I'll be introducing payables. But really what these videos and blog posts are going to be looking at is cash flow. Receivables represent money that we are expecting to flow into the company while payables are funds we expect to flow out of the company. But in reality these are all different ways to manage cash flow and the way we manage these cash flows can have a positive or negative effect on the company.

Cash flow management is important for any business, but I would argue it is especially important in equine and agriculture businesses and I'll explain why. Listen to a podcast or visit a blog about starting your own business and selecting your industry. You will hear time and time again that it is important to select something that people don't just want, but that they need. Something that is efficient to produce or sell, where you can limit costs, and there's a hugh demand for a reasonable price. An industry where costs are predictable and revenues are consistently trending upward. If you don't have these characteristics you'll be advised that you need to make adjustments.

Great, that's solid advice, it makes sense, and seems to be straightforward. But if I'm going to be open and honest with you that's just not the nature of the equine and agriculture industries. It's just not realistic to expect businesses in those industries to be able to conform to these standards. Let's look at why. For an equine business your funds are typically going to come from a couple different places, training and/or boarding, sales, breeding, earnings, or a service you provide such as farrier services. Many of these items are seasonal, fluctuate over the years, and revenue and expenses can vary a lot based on variables that are out of your control. For agriculture businesses you also have a variable revenue and expense flow that can be hard to predict. If you're involved in the production of animal products the costs associated with caring for those animals can increase without warning and production can suffer as a result. If you're producing crops your harvest may be highly affected by unusual weather conditions. The point being these industries don't have the characteristics of a safe business decision and while they are incredibly rewarding they require forethought and planning to be run successfully.

So how do you prepare for these factors? The main thing is cash flow and learning how to best predict that cash flow, but also how to prepare for the unexpected cash flow problems you may experience. That's why receivables and payables management is so important. Proper management of these somewhat predictable items can help "cushion" those unpredictable cash flow situations as well. We'll go more into preparing for these at a later date, but for now let's focus on receivables and payables.

Before I finish this intro I just want to say two more things. First, management of basic operations in a business is first and foremost about managing the inflow of cash and the outflow of cash. Without this flow of cash the business cannot survive. Second, I'm going to spend so much time on this information because it is some of the most important information you will want to master. It is key to making sure your business can grow.

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