Financial Planning
Business Finance: 4 Cash Flow Lessons That Work
Why manage your Cash Flow? The P&L statement does not tell you what happened to your cash balance during the period, and because cash flow constitutes more than just profit and loss, it is also affected by: Accounts receivable, Accounts payable Inventory Capital expenditures, borrowings and debt service Other "timing" differences
That's why you can't look at your income statement and see what happened to your cash during the month. The rules of accounting determine when transactions are recorded in your financials and how they are recorded. The reality of business determines when you receive or give out your cash. Well managed cash flow ensures you can take up new projects and avoid business shutdown even if some receivables get delayed.
Every time a business has a clear picture of cash flows on a weekly, monthly and quarterly basis, they are reaping benefits like: Eliminating the constant worry associated with cash balance Improved relationships with vendors See potential cash flow problems long before they happen Plan new products/projects better
Following are 4 cash flow rules that all successful businesses/ CFOs ensure:
1. Don’t run out of Cash: Otherwise the business fails. Ensure that you have at least two back-up or standby cash sources if the primary source stops for some reason. There will be a small cost associated with it, but its nothing compared to the cost of lost customers, lost credit worthiness, and distrust of vendors and partners.
2. What’s your cash balance right now? It's critical that you know exactly what your cash balance is. Even experienced business executives/CFOs are looking into this regularly; otherwise you can’t make accurate business decisions, like deciding whether to take up a great new discount if you bought supplies in bulk. Depending on your business, either have a person, or an automated system responsible for compiling and monitoring cash balance – on a daily basis, so that you close each day knowing your cash balance.
3. Bank balance is Not the right indicator: The bank balance and the cash balance are two different things and will rarely be the same. You need to maintain cash flow book separately. And that ties in with rule #2. Many small business owners make this error.
4. Work out scenarios for Cash flow projections 1-2 quarters ahead: what will happen to cash flows if business grew 20% more than you planned? When would the business need to spend on getting the supplies etc to service the new demand? Or, what will happen if business growth is lesser than you planned? When do you start cutting down fixed costs? Every successful business executive works a few scenarios. So invest some time and effort to develop cash flow projections 1-2 quarters ahead.
If you follow the above steps, your business will have cash flow under control so that you are free to focus on driving the business. And if need help in your business financial planning, please contact us with your requirement.
