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Cash explained to Kids

Explanations for kids... and adults!


What is Cash Flow?

Cash flow is like the money that comes in and out of your piggy bank.

Why is it important for Businesses?

They need to make sure they have enough money coming in to pay for things like rent, salaries, and supplies.

They also need to make sure they have enough money to invest in growing their business or saving for the future.


Net Income vs. Cash:


It's important to note that net income is not the same as cash flow.

Net income is the profit a business makes after subtracting expenses from revenue.

Net income does not take into account changes in cash, such as money spent on capital expenditures or money received from financing activities.

Example: Let's say your lemonade stand makes $100 in revenue and has $80 in expenses, so your net income is $20. However, if you also spent $15 on a new lemon squeezer, your cash flow would actually be only $5.


Investing in Capital Expenditures (Capex):

Investing in capital expenditures is another aspect of cash flow management.

This means using your money to invest in long-term assets that can generate more revenue or improve the efficiency of your business.

Example: Let's say you run a lemonade stand and want to increase your production.

You might invest in a new lemon squeezer or a larger pitcher.

This would require spending some money upfront, but it could pay off in the long run by helping you sell more lemonade and earn more money.


What is Liquidity Planning?

Liquidity planning is an important aspect of cash flow management.

This means making sure you have enough cash on hand to cover your expenses in case there's an unexpected cost or decrease in sales.

Example: Let's say you're running a lemonade stand and one day it rains, so you don't make as much money.

If you didn't plan for this and save enough money, you might not be able to afford to buy more lemons and sugar for the next day.


Financing:

Financing is the final aspect of cash flow management.

This means borrowing money to invest in your business or to cover expenses when you don't have enough cash on hand.

Example: If you want to buy a new lemon squeezer but don't have enough money, you could borrow some money from your parents or a friend.

However, it's important to make sure you can pay back the money you borrow.


Managing Your Cash Flow:

It means keeping track of how much money you have coming in and going out.

It also means planning for unexpected expenses, investing in capex, and using financing wisely.

Just like your piggy bank, it's important to manage your money well so you use it to achieve your goals and avoid running out of cash.




 




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