Sometimes terminology gets in our way. In business, we put a great deal of emphasis on cash flow. However, the term cash flow is used in a number of different contexts and it can be confusing. For example, business owners talk extensively about the Statement of Cash Flows and the Cash Budget. They are two completely different documents developed and used for two completely different reasons.
Cash management takes a great deal of a business owner's time. In the short term, the cash budget is important because it helps the business owner manage the net working capital of the company.
The business owner prepares the cash budget on a monthly basis and looks at the cash the firm takes in versus the cash the firm takes out. This document literally lets the business owner know how much cash is available to the firm at the end of each month and if the firm has to borrow or can repay previously borrowed funds. In effect, the cash budget is a short-term financial statement, looking at monthly or quarterly cash data.
The Statement of Cash Flows is a more comprehensive statement prepared along with the Income Statement and Balance Sheet. The Statement of Cash Flows looks at changes in operating, investing, and financing cash over a longer period of time such as a quarter or a year. It is a required financial statement by FASB.
In order to adequately manage a company, the small business owner must prepare both financial statements regularly and analyze them carefully.
