Understanding Closely Held Company Cash Flow

Date01 July 2018
AuthorLeonard J. Sliwoski
Published date01 July 2018
Understanding Closely Held
Company Cash Flow
Leonard J. Sliwoski
Closely held com-
pany owners, and
their advisors, often
lack a basic under-
standing of nancial
concepts related to
company operations.
This is particularly
true in terms of
nancing sales
growth. This article
discusses nancial concepts
that allow closely held com-
pany owners and their advisors
to understand cash ow. The
article also discusses using the
statement of cash ows to ana-
lyze closely held company cash
ow management.
Closely held company
start-up nancing is usually
provided by owners and/or a
lending institution, typically a
bank [in addition to bank
nancing, there are numerous
public sector entities that pro-
vide debt nancing. For
instance, the Small Business
Administration (SBA), various
state loan programs, and vari-
ous state and local economic
development loan programs
provide debt nancing to
closely held companies. These
public sector entities are
GAPnanciers. They pro-
vide nancing where a normal
credit, or underwriting, gap,
such as insufcient collateral,
exists]. The primary nancial
concern from company incep-
tion to dissolution is cash ow
management. Cash ow man-
agement requires understand-
ing sources and timing of cash
ows as well as various com-
peting needs for cash generated
from operations.
This information
is not directly pro-
vided or either the
balance sheet or the
income statement.
Rather, this informa-
tion is provided on
the statement of cash
ows. However, this
nancial statement is
difcult to under-
stand without an
understanding of
basic nancial concepts. These
concepts include gross cash
ow (GCF), the cash conver-
sion cycle (CCC), permanent
working capital (PWC), sea-
sonal working capital (SWC),
competing needs for cash gen-
erated from operations, and
matching cash sources
and uses.
Gross Cash Flow (GCF)
GCF is the maximum cash
available in a reporting period
from operations or from
working the company.Oper-
ations include selling products
and/or providing services and
incurring all necessary operat-
ing expenses such as cost of
The article denes and examines terminology used
in company cash ow management. The article
further examines cash ow generating sources and
competing needs for cash ow generated. Visual
diagrams and examples are used throughout the
article to illustrate and highlight important concepts
and relationships. Finally, the article discusses
using the statement of cash ows in analyzing
closely held company nancial affairs.
© 2018 Wiley Peri odicals, Inc.
© 2018 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22352 83

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