While a business can survive for a short time without sales or profits, if a business runs out of cash, it will cease to exist. Therefore, readily available cash is the primary indicator of business health. For this reason the inflow and outflow of cash needs careful monitoring and management.
The three components of cash flow are:
• Funds on hand at the beginning of any period
• Funds received and spent during an ensuing period
• And the funds remaining at the end of that period
Profit is the difference between the total amount your business earns and all of its costs, usually assessed over a year or other time period. Cash is the amount you have on hand to pay debts. You can be showing a good profit on the books and still be strapped for cash to cover immediate debt. Income and expenditure cash flows rarely coincide BUT you must always be in a position to meet your scheduled payments. This means there can be times when you could simply NOT have enough readily available cash to meet your commitments. Cash flow management is basically about speeding up the inflows and slowing down the outflows.
A cash flow forecast will assist you with structuring your business’ policies for working capital management to meet your cash needs, or when working with your accountant to apply for financing .
• To improve cash flow you need to work on the drivers of cash flow:
– Receivables
– Suppliers (payables)
– Inventory
– Assets
– Costs (expenses)
– Seasonality
– Sales volume
– Taxes
Measuring Your Performance
• Working on the drivers ought to show you where some improvements in your cash flow situation can be made. However, these efforts will be wasted unless the actual
results are monitored regularly against a cash flow forecast. Failing to fulfill, or exceeding your plan’s expectations will affect what you need to do to modify it. There is always the opportunity to be better. If you’re not monitoring your actual results regularly, you can’t capitalize on any opportunities that improved cash flow might offer. Remember: What you can measure, you can manage.
Summary
• Let me conclude with a reminder of the importance of cash flow – more businesses fail because of poor cash flow than because of poor profit.
• Break your cash flow down into the primary drivers and work on each one to maximize improvements.
• A cash flow forecast will assist you with predicting and monitoring your cash flow.
Simons Bitzer & Associates, CPAs & Strategic Business Advisors www.simonsbitzer.com
