May 26, 2020

Cashflow Reality and Misconceptions

Can be your company experiencing financial anxiety? Based on a U. S. Bank study, 82 percent of business failures are due to poor cash administration. In the current economic environment cash management has become even more critical for the life of small companies. According to various research institutions, the companies that are successfully surviving are already exerting control over their cash flow and costs.

Financial experts consistently agree that financial projections and cash planning are the most important financial planning tools for a business. That said, money planning is the least intuitive of the financial management tools, and therefore the most challenging. And yet, nobody is more experienced than a business owner to forecast the cash for his/her business. The notion that only a financial expert can produce cash flow projections is erroneous. Think about it, the normal accountant is focused on the balance sheet and profit & loss statement (historical information) because their primary responsibility to their clients is to produce the tax returns at the end of the year. The typical bookkeeper is focused on the basic construction necessary to keep the accountant happy, and the books in order. Of course there are exclusions to the “typical”, and these individuals ought to be applauded.

Correcting some common misconceptions about cash and cash flow preparing:

“We are profitable. ”

Wonderful, but profits are an accounting idea and have no direct relationship to cash flow. Profits are on paper. Money is what you spend, and payments you have actually received, i. e. it is what you have “in the bank”.
“Our accounts receivable is strong. ”

Again fantastic, but receivables have no direct relationship to cash flow since it has no designated timeframe. Receivables (e. g. invoices) is not money. It is the intent of your customers to pay for at some future date. Receivables is not cash until it is in hand.
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“We don’t have the time to do a plan. inch

The busier your company is, the more your company needs to plan. Financial projections do not have to take hours or times.
“We’re not big enough to require cash flow projections”.

Not true. In reality, it is the smaller businesses who do not have strong pockets that need financial planning the most. These are the companies most at risk when accounts payable gets ahead of money on hand, or when long-term growth/acquisitions expenses out strip short-term income.
“It is too complex for the average business person to produce. ”

Not true. It is a matter of making good and reasonable estimates about what you are going to be selling and when, what it will cost and when, and exactly what and when your expenses will be, i. e. money-in and when vs money-out and when. There are tools to help with this process.
“We do the financial projections in our heads. ”

Unless your organization has just one customer, and only a number of expenses and cost-of-goods categories, it is unrealistic to believe that a business person can juggle all the variables in his mind.
“We do our cash flow projections once a year when we do our spending budget. ”

The thought process behind this particular statement defies logic. Do you only check your bank account once a year? Ideally, a cash flow projection should be done every time A/P is processed (e. g. bank checks cut), or at the very least once a month.
“We look at our income statements and balance sheet every month. ”

Nor the income statement nor the total amount sheet is sufficient to plan plus manage cash. These reports are usually historic, they are not future facing.
“Our books are accrual-based, so we have a tendency need cash flow projections. ”

Incorrect. Accrual-based or cash-based accounting is about how your company handles sales plus expenses, primarily for tax reasons. Your accounting method has no having on cash projections which cope with the future timing of cash-in and cash-out for your company.
“We’re OK since we regularly produce a Cash Flow Statement. ”

Not true. Do not befuddle a Cash Flow Statement with an Income Projection. The Cash Flow Statement displays how cash has flowed in and out of your business in the past. The Cash Stream Projection shows the cash situation over a period of time in the future.
“Our invoices are usually due upon receipt, so we no longer need financial projections. ”

Incorrect. Keep in mind, growth/acquisitions (e. g. expanding business hours, new product lines or program, new staff, etc . ) or even changes in vendor payments (e. g. acceleration of payment plan, increase in cost, etc . ) plus expenses (e. g. rate increases, additional services, etc . ) might have a dramatic impact on your cash flow.
There are several ways to do a cash flow discharge. If you talk to financial experts both may have their preferred method and terminology. However , you do not have to defer to a financial specialist to get your economic projects done in a rather painless manner. ezTRUNNION LLC has developed an income projection and cash management tool that is integrated with QuickBooks(R), the most famous accounting package for small businesses. MONEY Cop(TM) has enough flexibility built into the tool to allow companies to produce cash flow projections that suite their own situation and needs. Because the device focuses only on cash flow projections and cash management the price point is affordable for small businesses.

Additional products available that also do cash flow projections. Free Excel(R) themes are available from a variety of resources, which includes SCORE. These templates require the user to manually enter all information, and by hand keep them up to date. Because of the time required to acquire the necessary information and then important it in, users typically turn out to be discouraged about producing cash flow projections on a regular basis.

There are also financial planning equipment, available for a price, that have a host of reports, graphs, and tools integrated into one particular application. These types of tools fall into one of two categories: stand-alone or integrated. The particular stand-alone financial planning tools nevertheless require the collection and keying-in of essential data, but these equipment are affordable to a small business, and product a variety of reports and graphs. These tools vary in their “friendliness” to layman users. Check them out there before buying. The integrated financial preparing tools can pull necessary information from specified accounting systems (very few integrate with QuickBooks), but these tools tend to be more expensive, providing reports, graphs and other financial tools geared to larger businesses. Be sure you understand the pricing (e. g. monthly service cost or one-time purchase) before buying.

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