Cash is King

Most small business owners would say, they live or die by cash flow, but sadly, so few businesses have a good process for forecasting cash flow.

Companies such as Sage offer canned packages, but the best cash flow management tool is going to be the one customized to the needs of the business and it doesn’t have to be complicated.  The first step is to identify the sources of company data available to you.  Most of what is needed can be found in the accounting department, including accounts receivable and accounts payable aging schedules.

The next step is to identify cash inflows and cash outflows.  Cash inflows are cash receipts, collections from customers and refunds.  Cash outflows are payroll, insurance, office supplies and inventory, to name a few.  The type of operation will drive the types of inflows and outflows.  The majority of costs for a service business will likely be labor related, whereas, a product centered business will have inventory costs.

When constructing your analysis, remember that your focus is on cash, so start with the reconciled cash balance and forecast out in a frequency that matches your accounts payable cycle.  For instance, if you pay bills every week, forecast out in weekly increments.  If you pay every two weeks, forecast in two week increments.  Add the cash inflows and subtract the cash outflows for each expected increment.  If you’re short in the forecast for any given week, you’ll need to make adjustments, such as stepping up collection efforts now to shore up the anticipated shortage. 

Don’t forget annual and semi-annual payments for expenses such as insurance and software.  One of the biggest advantages to cash forecasting is to be able to plan ahead for these larger expenses.  Cash flow forecasting is an opportunity to review the inflow and outflow patterns of the business, which may end up exposing areas in need of improvement such as the collection policies and procedures of the business.

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