A business needs to understand that there is a difference between profit and cash. Eventually a business needs to be able to make a profit, however, providing it is properly financed and has adequate cash flow a business can survive for a considerable period of time without profits.
Cash Conversion Cycle Formula
All businesses have a cash conversion cycle, it is the time in days between paying for inventory and receiving the cash from the sale of that inventory from customers. The cash conversion cycle formula can be used to calculate the number of days.
Accounts Receivable Opening Balance
The opening day accounts receivable balance forms part of the opening balance sheet of the business. Accounts receivable are amounts which are owed to you by your customers, they are sometimes referred to as trade debtors.
When you allow your customer credit and invoice them for a product or service and receive payment at a later date 30 days 60 days etc, then while they owe you the money they are classified as an accounts receivable.
Enter Cash Opening Balance
The opening day cash balance forms part of the opening balance sheet of the business, and includes amounts which are held by a business in the form of notes and coins (e.g. petty cash) or which are held at a bank in the form of on demand deposits such as current accounts and savings accounts.
The cash opening balance comes under the heading of current assets in the balance sheet of the business.
Burn Rate for a Start-Up Business
New businesses will often not be profitable in their early stages and will require cash to keep going. The rate at which the cash is used is referred to as the burn rate, it is a measure of negative cash flow, and is typically quoted as a monthly burn rate.