Abstract

The goals of the authors of this white paper are to define cash flow and then specifically address its impact on retailers of all sizes. Using accounting principles as a basis for the discussion, they use real world examples and relevant situations to demonstrate the importance of predicting and managing the flow of cash, most specifically for retailers.

What is Cash flow and why does it matter?

“Cash is king” – we have all heard this maxim many times. But what does it mean, and how does it apply to modern retailers? In short, it means that the most important financial questions about a business all start and end with cash.

Cash in a business is considered in the framework of three questions: 1) how much cash do we have, 2) where is our cash coming from, and 3) where is our cash going. The answer to each of these questions underpins the financial management of a retail business. A retail operator will ignore the firm’s cash position at his peril.

The first question, how much cash do we have, is more properly phrased “how much cash is on hand?” The answer is very straightforward: $100, $20,000, etc. We all intrinsically understand this from our personal lives – we check our wallets and bank accounts to see if we can afford to buy something or if we are able to pay our mortgage this month. A business must go through much the same process, instead considering whether there is sufficient cash on hand to cover payroll, vendor payments, and other obligations.

The second two questions consider “cash flow” – that is, the movement of funds into and out of the business. In a retail setting, “Where is our cash coming from” is really asking about customer payments – are they paying with cash or credit card, and when are they paying on their accounts. In other words, when do revenues become cash on hand? In certain other settings, it can also mean draws on a revolving line of credit, equity investments, or mortgages to buy equipment or property. These are alternatively termed “cash inflows.” “Where is our cash going” looks at the payments that the business makes. There are many types of payments – purchasing inventory, paying employees, maintaining common areas, paying down debt, tax payments, and distributions to owners, for example. These payments are also called “cash outflows.” At the intersection of cash inflows and cash outflows lies the business’s cash on hand – what is left after all monies are collected and obligations are paid.

To download a PDF of the complete White Paper, click here