Managing Cash Flow in your Business - March 2018 Edition
Hello,
Cash is the lifeblood of any small to mid-sized company, especially high-growth and/or highly leveraged ones. Still, many businesses struggle to maintain an accurate picture of current cash flow position and how that position will change in the future.
Cash flow is a key indicator of financial health in your business. Without cash in your business, there is a good chance that your business will not survive. The Small Business Administration says that "inadequate cash reserves" are a top reason startups and growing businesses don't succeed. It's called "running out of money," and it will shut you down faster than anything else.
A common misinterpretation i hear often is that Profit = Cash.
Wrong!
Profit does not equal cash. There are too many variables outside of Profit & Loss Statement (Income Statement) that can impact upon your cash flow. Variables such as taxation payments, purchase of capital equipment and loan repayments do not affect the Profit & Loss Statement but do affect your cash flow. The accounting method used may also cause a significant difference between profit and cash.
Analyzing Cash Flow in your Business
The Statement of Cash Flows details all cash inflow and outflows and boils it down to how much cash the company has generated in a given period.
Cash flow is calculated by adding and subtracting certain items to the net income. These adjustments must be made because non-cash items may be included into the net income even though it does not represent any cash in the bank.
Accounts Receivable - If accounts receivable decreases from the previous years (you have to compare by going back a few years), this means that more cash has entered the company from customers paying off their credit accounts. If accounts receivable increases, this means that the company has sold more products that money received. Close monitoring is critical to ensure that monies come back into the business quickly.
Inventory - The same concept applies. If inventory decreases from the previous years, this means that more inventory has been sold than purchased. If inventory increases, this means that the company has purchased more product than sold and this can future cash flow issues if the inventory does not move.
Accounts Payable - The third big warning sign is accounts payable. Since this is a positive number, the cash hasn’t left yet, so it’s been added back to net income because it is stated as a liability in the Balance Sheet.
For a company to be healthy, the cash from operating activities should be positive, but the quality of the cash is just as important. The net income at the top of the Cash Flow Statement should preferably be a high positive number and the adjustment differences should not be huge. If this is the case, the majority of cash from net income should drop to the Cash from Operations line.
If the cash from operations is a positive number, this will allow the company to be able to repay its financing loans and purchase assets for the business. If the cash from operations is negative, liquidity becomes an issue that seriously needs to be addressed immediately.
Cash Flow Forecasts
As a business entrepreneur, it is important for your business to prepare a cash flow forecast at least monthly. Your cash flow forecast should be for the next 3 months. Most cloud based software programs will give you most of your information if the information is kept up to date.
Your business can end a financial quarter or year showing a solid profit performance on paper but still find yourself with not money. As mentioned earlier, there are too many variables that can impact upon your cash flow.
A business owner that focuses too much on profit and not enough on cash flow can be doomed to fail. Receipts often lag behind sales, suppliers demand payments or else cut you off and loans become due. An accurate cash-flow forecast allows you to stay in business while you wait for the profit you see on your books to become reality.
Having an accurate cash flow forecast in place can help you foresee potential problems which may arise in the year ahead, and it can help businesses make important decisions about their future.
The most important part of cash flow forecasting to remember is to understand what you're looking at and address any cash flow issues that you may have. Cash flow problems won't go away on their own. Depending on the magnitude of the cash flow problem you may need to take different measures - ranging from "tightening the belt" to taking out a loan. Whatever the action necessary, having your forecast ready and easy to understand will make this process much, much less painful.
If you’re still profitable after having cash flow difficulties; you may just have to tighten up your credit control measures, reduce your costs or perhaps seek advice from the bank. More serious and regular cash flow predicaments will require more drastic action.
The likelihood is, if you face cash flow problems frequently, one day your luck is going to run out - so tackle issues early and take the stress down a notch!
I would like to invite you to my first event of the year. Join me in the Google Hangout on Thursday 15th March 2018 and i shall show you how you can apply 6 Strategies to Masterminding Cash Flow in your Business immediately. During this hangout, I am going to share with you the following successful strategies that have been adopted by many other entrepreneurs that have been through the same issues.
Here is the link to join with me.
Please note the event in your calendar and i look forward to hanging out with you.
Cheers,
Peter Adams
Cash is the lifeblood of any small to mid-sized company, especially high-growth and/or highly leveraged ones. Still, many businesses struggle to maintain an accurate picture of current cash flow position and how that position will change in the future.
Cash flow is a key indicator of financial health in your business. Without cash in your business, there is a good chance that your business will not survive. The Small Business Administration says that "inadequate cash reserves" are a top reason startups and growing businesses don't succeed. It's called "running out of money," and it will shut you down faster than anything else.
A common misinterpretation i hear often is that Profit = Cash.
Wrong!
Profit does not equal cash. There are too many variables outside of Profit & Loss Statement (Income Statement) that can impact upon your cash flow. Variables such as taxation payments, purchase of capital equipment and loan repayments do not affect the Profit & Loss Statement but do affect your cash flow. The accounting method used may also cause a significant difference between profit and cash.
Analyzing Cash Flow in your Business
The Statement of Cash Flows details all cash inflow and outflows and boils it down to how much cash the company has generated in a given period.
Cash Flow from Operations
Accounts Receivable - If accounts receivable decreases from the previous years (you have to compare by going back a few years), this means that more cash has entered the company from customers paying off their credit accounts. If accounts receivable increases, this means that the company has sold more products that money received. Close monitoring is critical to ensure that monies come back into the business quickly.
Inventory - The same concept applies. If inventory decreases from the previous years, this means that more inventory has been sold than purchased. If inventory increases, this means that the company has purchased more product than sold and this can future cash flow issues if the inventory does not move.
Accounts Payable - The third big warning sign is accounts payable. Since this is a positive number, the cash hasn’t left yet, so it’s been added back to net income because it is stated as a liability in the Balance Sheet.
For a company to be healthy, the cash from operating activities should be positive, but the quality of the cash is just as important. The net income at the top of the Cash Flow Statement should preferably be a high positive number and the adjustment differences should not be huge. If this is the case, the majority of cash from net income should drop to the Cash from Operations line.
If the cash from operations is a positive number, this will allow the company to be able to repay its financing loans and purchase assets for the business. If the cash from operations is negative, liquidity becomes an issue that seriously needs to be addressed immediately.
Cash Flow Forecasts
As a business entrepreneur, it is important for your business to prepare a cash flow forecast at least monthly. Your cash flow forecast should be for the next 3 months. Most cloud based software programs will give you most of your information if the information is kept up to date.
Your business can end a financial quarter or year showing a solid profit performance on paper but still find yourself with not money. As mentioned earlier, there are too many variables that can impact upon your cash flow.
A business owner that focuses too much on profit and not enough on cash flow can be doomed to fail. Receipts often lag behind sales, suppliers demand payments or else cut you off and loans become due. An accurate cash-flow forecast allows you to stay in business while you wait for the profit you see on your books to become reality.
Having an accurate cash flow forecast in place can help you foresee potential problems which may arise in the year ahead, and it can help businesses make important decisions about their future.
The most important part of cash flow forecasting to remember is to understand what you're looking at and address any cash flow issues that you may have. Cash flow problems won't go away on their own. Depending on the magnitude of the cash flow problem you may need to take different measures - ranging from "tightening the belt" to taking out a loan. Whatever the action necessary, having your forecast ready and easy to understand will make this process much, much less painful.
If you’re still profitable after having cash flow difficulties; you may just have to tighten up your credit control measures, reduce your costs or perhaps seek advice from the bank. More serious and regular cash flow predicaments will require more drastic action.
The likelihood is, if you face cash flow problems frequently, one day your luck is going to run out - so tackle issues early and take the stress down a notch!
Invitation
I would like to invite you to my first event of the year. Join me in the Google Hangout on Thursday 15th March 2018 and i shall show you how you can apply 6 Strategies to Masterminding Cash Flow in your Business immediately. During this hangout, I am going to share with you the following successful strategies that have been adopted by many other entrepreneurs that have been through the same issues.
- Cash Flow Life Cycle
- Step 1 – Analysing Present Conditions
- Step 2 - No Internal Control Systems
- Step 3 – Risk Assessment
- Step 4 – Planning & Monitoring
- Step 5 – The Road to Business Excellence
- Step 6 - Secret - To be revealed on the hangout day.
Here is the link to join with me.
https://plus.google.com/u/0/events/coa1qtofqauk1pb0e5prc92o624
Please note the event in your calendar and i look forward to hanging out with you.
Cheers,
Peter Adams
Comments
Post a Comment