Understanding Closely Held Company Cash Flow
Date | 01 July 2018 |
Author | Leonard J. Sliwoski |
DOI | http://doi.org/10.1002/jcaf.22352 |
Published date | 01 July 2018 |
Understanding Closely Held
Company Cash Flow
Leonard J. Sliwoski
INTRODUCTION
Closely held com-
pany owners, and
their advisors, often
lack a basic under-
standing of financial
concepts related to
company operations.
This is particularly
true in terms of
financing sales
growth. This article
discusses financial concepts
that allow closely held com-
pany owners and their advisors
to understand cash flow. The
article also discusses using the
statement of cash flows to ana-
lyze closely held company cash
flow management.
CLOSELY HELD COMPANY
CASH FLOW MANAGEMENT
Closely held company
start-up financing is usually
provided by owners and/or a
lending institution, typically a
bank [in addition to bank
financing, there are numerous
public sector entities that pro-
vide debt financing. For
instance, the Small Business
Administration (SBA), various
state loan programs, and vari-
ous state and local economic
development loan programs
provide debt financing to
closely held companies. These
public sector entities are
“GAP”financiers. They pro-
vide financing where a normal
credit, or underwriting, gap,
such as insufficient collateral,
exists]. The primary financial
concern from company incep-
tion to dissolution is cash flow
management. Cash flow man-
agement requires understand-
ing sources and timing of cash
flows 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
flows. However, this
financial statement is
difficult to under-
stand without an
understanding of
basic financial concepts. These
concepts include gross cash
flow (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 defines and examines terminology used
in company cash flow management. The article
further examines cash flow generating sources and
competing needs for cash flow 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 flows in analyzing
closely held company financial 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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