[3 Minute Read]
Financial management is the most critical aspect of every business and the responsibility of the owners and key managers. Prudent financial management is multi-faceted and includes overseeing the Balance Sheet, monitoring the Profit and Loss statement and managing cash flow. Each of these is critical to the health of an organization and is an ongoing process throughout each month.
One of the most crucial activities in financial management is managing cash flow. Cash is the most important asset and the lifeblood of any company. Cash must be managed and monitored to ensure there is an ample supply to pay operating expenses, service debt, purchase inventory, pay vendors and provide compensation to the owners. Without a solid established cash position it becomes increasingly more difficult to operate effectively and efficiency while maintaining the liquidity of the organization.
A key component of a cash flow management plan is Monthly Cash Flow Forecasting. Cash Flow Forecasting involves projecting all cash coming into the business (sales revenue, loans, investments, personal funds, A/R and grants) and all cash going out (operating expenses, loan payments, draws, merchandise, A/P, taxes, etc.). Each month will show the Beginning Cash Balance, anticipated Cash-in from all sources and Cash-out for all payments made. The result will be the forecasted amount of cash that will be available to the organization at the end of the month.
The purpose of Monthly Cash Flow Forecasting is threefold; One, the total amount of anticipated cash in and out of the company. Two, it allows a business owner or company executive to determine if there will be any shortfalls during the month, or if there is ample cash to pay all obligations. And three, if there are possible shortfalls it allows for a proactive rather than a reactive approach to finding a solution…..all before the month begins. If it’s determined there will be a shortfall of cash several strategies can be used to address this issue. They include; having a sale to generate additional cash, obtaining a loan or using a line of credit, investing personal funds on a temporary basis or delaying payments to creditors that frees cash for other areas. In short, it provides an opportunity to create a solution (proactive) rather than being “surprised” and being forced into a poor decision (reactive) that will impact the business both short and long-term.
A part of the Monthly Cash Flow Forecasting model involves tracking the actual taken Cash-in and Cash-out of the organization in each category. This provides the responsible individual with a checks and balance system of tracking the projected versus actual cash in and out and determine if there were any mistakes in the forecasting. Example, if advertising was projected to be $1,000 for the month and $3,000 was spent….why? How was this mistake made? Who is responsible for monitoring this? What can be done to avoid this in the future? This is $2,000 less that can be used in another area of the Forecasting model.
Directly below is an example of an excel spreadsheet that is used by my clients to forecast and track their cash flow and P/L each month. It’s designed to calculate all cash in and out of the business as well as the P/L with single entries. It’s very easy to use and provides one with all the information necessary to have a meaningful and informative cash flow model that can is imperative in every business.
Lastly, businesses that do not forecast their cash flow sources and expenditures decrease their chances of succeeding. Having to react under bad circumstances leads to poor decision making and increases the chances of running out of cash. And when you’re out of cash……..you’re out of business.
We can literally determine within 15 - 20 minutes, how healthy your business is. If you have a sense that you're in a dire situation, it's worth having us take a look as there may still be time to help reverse your situation. Just let us know where you need help by contacting us.