Cashflow Management
At its simplest, cash flow management means keeping a close eye on cash coming in and going out of the business. But that is not enough. Effective management of anything—whether that is cash, people or businesses—requires an ability to look back and forward, as well as being aware of what is happening now. These varied perspectives make you a better manager, because, like boy scouts, you can be prepared, no matter what. Times are difficult. But your business is faring well enough that you have no complaints. However, who knows what future might bring, especially with the COVID-19 pandemic, and returning back to normalcy is nowhere in sight. If we do return, it will be to a new normal, rather than what used to be, pre-pandemic. You are not the only one in this boat. Business people everywhere, especially small and medium business operators, are thinking this way. This is why cashflow forecasting, cash flow planning and cash flow management are again becoming hot topics.The Status of Cashflow Management in America
Would you be surprised to learn that according to a 2019 survey 74 percent of small businesses judged cash flow tasks as difficult? That is three out of four businesses that took part in the survey!74 percent of small businesses judged cash flow tasks as difficult
This is not surprising. Studies, including those by the Transamerica Center for Retirement Studies and the National Bureau of Economic Research, show that Americans are not saving enough for retirement for the same reason. Because they do not understand the basics of savings and investment, don’t know where to begin and think things are too complicated. This same mentality is shared by business owners too, as the survey shows.
Cashflow Forecasting
A cashflow forecast is a plan that shows how much money your business expects to bring in and will have to pay out in a given period. A cashflow forecast tells you when money comes in or goes out of your bank account.
An effective cashflow forecast must be based on forecasts of your sales, expenses and cashflow patterns. It is possible to be profitable on your income statement and still get into financial trouble because you have poor cashflow management.
Forecast Time Frames
Typically, businesses make cashflow forecasts for a year or more, just like they do sales projections. But what is really useful for business operations are the short term, immediate forecasts.
Making a Mini Cashflow Forecast
- To begin with, start with today’s cash balance.
- Next, make a mini sales forecast of what your sales performance will be in the next few weeks.
- Then, how much expenses and costs will need to be covered for that same period.
- Finally, based on your starting cash balance add sales inflows, subtract cost outflows, and you’ll have a projected ending cash balance and a mini cashflow forecast.
Now you will be able to know whether there will be cash shortages to meet expenses, how much and when they will be. You will also know when you will have extra cash on hand, or cash surpluses.
That is not to say your monthly and annual cashflow forecasts are meaningless. They enable you to gauge where your business is headed and enable you to plan for long term projects, business expansions and the like.
Cash Flow Basics
Cash on hand. This is the sum of all the cash in hand, in your bank accounts plus deposited funds.
Days cash on hand. This is an indicator of how many days you can manage with the available cash, while paying up your expenses, assuming no new inflows from sales. This is your cash cushion. If you have less than 15 days—that is not enough cash to last 15 days—you are going to be struggling.
Payment terms. Payment terms—the time you give your customers before they pay you—are a critical factor in cash flow management. What are the average payment terms in your industry?
Revenues and Inflows. All cash coming into the business from sales, capital events, loans, and investors.
Expenses and Outflows. All cash leaving the business from expenses, payroll, purchases of inventory and fixed assets.
Many cash outflows are predictable–like your payroll costs and cost of material or services obtained–and can be planned ahead.
Cash shortages and surpluses. Sometimes you will find your business is temporarily strapped for cash or have surplus cash on hand. Cashflow forecasts give you notice of these periods so that you may prepare ahead of time. Could some of your customers pay a bit ahead of time? Would your creditors give you a discount on payable balances if you pay them ahead of time? If not, where do you want to park the extra cash till you need it? These finer points of cashflow management are only possible if you have a good idea about your future cash inflows and outflows.
Benefits of a Cashflow Forecast
Whether your business is big or small, there are many advantages to be had with cashflow forecasting.
A frequently updated cashflow forecast enables you to easily and safely make various business decisions:
- Is your business facing the risk of running low on cash?
- Will you need to borrow or find loan facilities, for how much and when?
- Can you invest in new projects, how much can you afford and when will it be possible?
- Can you take money out of your business, how much and when will that be possible?
- Are you in a position to sell a new product or offer a new service?
- Can you afford to recruit new staff members?
- Is outsourcing of routine, day to day tasks an option for your business?
- Can you afford business expansion projects?
Cashflow forecasting helps you decide simple things like whether you should get new premises on rent, or make more complicated decisions, like whether you are in a position to expand your markets to new regions and even other countries.
What Gets Measured Gets Managed
“What gets measured gets managed.” A quote widely (and incorrectly) attributed to Peter Drucker, one of the most widely known and influential thinkers on management, whose work continues to be used by managers worldwide. As for another familiar saying, we believe in the opposite when it comes to cashflows:
What you don’t know CAN hurt you!
When you forecast your cashflows, and find shortfalls, you know you need to take action. So that gets managed.
What happens if you had not planned for a cash strapped period? It comes upon you unexpectedly and creates a business crisis.
It is the same for excess cash. If you know when you are likely to have excess cash coming in, you can plan what must be done with it, even if that is for a short period. What is the point of keeping extra cash sitting in the bank earning little interest? With good cash flow forecasting, you have the time to find more lucrative places to park excess cash.
All of the above is what is called cashflow management. Cashflow forecasting enables you manage your cashflows—inflows and outflows—in a prudent manner, without getting in financial trouble, wasting money, or foregoing earning potential.
How Cashflow Projections Are Made
The most challenging part of cashflow management and forecasting however, are not the ideas themselves, but the means that most businesses use to achieve that. Many businesses depend on Excel worksheets and more recently, Google Sheets. These are cumbersome and error prone.
Have you met any regular person who loves Excel sheets and can consistently produce accurate and timely information? This is part of the problem. It is human nature to put off difficult things. That is a big part of why many small businesses neglect their cashflow management. We need to change that.
If you want to make your cashflow management and cashflow forecasting easier you need to implement systems and processes. At Proseer we leverage real time accounting and bank data and combine it with professional guidance to produce timely cashflow forecasts. These forecasts drive planning discussions about the past present and future and the result is a business that knows where it has been and where it is going.
Let us take heed from the above advice and change how you manage your cashflows.
At Proseer, we help our clients review and plan for their cash. We implement and utilize the best tools that help our clients move towards hassle-free, effective cashflow management. We take the struggle out of cash flow management with regularly scheduled meetings to review and update forecasts. If you have questions about cashflow forecasting and cashflow management, send us a note, or give us a call 954-686-8687.
