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August 7, 2013 / maxpproductions

Understanding Financial Statements: The Fundraiser Approach to Cash Flow Part III

The Fundraiser Approach to Cash Flow

The Fundraiser Approach to Cash Flow

This article is the third of a three part series that helps explain the basic concepts, in a fun easy way, of a cash flow statement of a business. It is geared towards children but anyone can benefit. The idea is to keep it to the basics.

In my first article on financial statements, I talked about how a profit and loss statement can be looked at as a pizza pie. In my second article, I talked about how understanding a balance sheet is like knowing what’s in your cookie jar. In this third article, I talk about cash flow. It’s like selling chocolate bars for your school!

Cash flow is simply the deposits of your business put into a bank account and payments made out of your bank account. It is the movement of cash in and out of a bank account over a period of time.

Let us say you are given the task of raising cash for your school during the months of July through September because they want to buy new sports equipment for after school programs. You have to go door to door in your neighborhood and ask people if they would like to buy chocolate bars. Some will say yes and pay you now even though it will take 12 weeks before the chocolate bars arrive. Others will say yes but promise to pay when the chocolate bars arrive.

When your chocolate bar fundraising is over, you have successfully secured $400 in sales, $200 was paid in cash and $200 are promises to pay later in 12 weeks when the chocolate bars arrive. But wait; now you have to order the chocolate bars and pay for them now! The chocolate bars cost $250. This is your cash flow in July:

  • Beginning cash =  $0
  • Cash received = $200
  • Cash spent = -$250
  • Balance = -$50

You have negative cash flow which means you are not taking in enough cash to cover what you spent. In the meantime, if you look at your financial statement it looks like this:

  • Income =  $400
  • Cost of chocolate bars = $250
  • Profit for school = $150

How can you have a $150 profit but have a negative cash balance? This is why cash flow is important because many businesses cannot cover their costs because they did not collect all the money owed to them when they made a sale.

So, what would a young entrepreneur do to solve this? Borrow from mom or dad.

Now the new cash flow is:

  • Beginning cash = $0
  • Cash received = $200
  • Cash spent = -$250
  • Cash left over = -$50
  • Borrowed Cash = +$50
  • Cash balance = $0

So, cash flow identifies how the flow of cash comes in and goes out by the operations and finance activities. Finance activities means you borrowed money or took it from savings from your piggy bank.

Now, it is September and you dropped off all your chocolate bars at the neighbors who ordered them.

They all pay you now for what is owed for the chocolate bars. You then turn around and pay mom or dad back.

This is your statement of cash flow activity from July through September:

  • Beginning cash = $0
  • Cash received July = $200
  • Cash spent July = -$250
  • Borrowed cash July = +$50
  • Cash received Sept. = $200
  • Pay mom or dad back = -$50
  • Cash balance = $150

Now, your cash balance is the profit you made back in July. All the money came in. I hope this explains cash flow. It can get much more complex than the example but keeping the concepts easy fun and simple is the best way.

Till next time…  

We hope you enjoyed our 3-part series on financial statements. If you have any questions, please let us know. We’re happy to help! And stay tuned, we will have more easy, fun, and simple articles on finances coming up soon.

If you want to revisit part I and II of our three part series click the following: Profit and Loss Statement and Balance Sheet.

Max P. Productions is a children’s book publisher focused on empowering children through story. The information in this article is copyright 2013 Max P. Productions. Use of this article in part or in whole must be granted by Max P. Productions. Please contact us at cs at maxpproductions dot com if you wish to use the content in this article. Thank you.

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