Cash Flow

The accounting system records the incoming and outgoing funds and calculates the financial status of the company, but there’s more to the handling of money than that. A business must have a surplus of cash on hand, usually in business checking and savings accounts. It’s for petty cash, emergencies, advertising costs, leveraging a good deal with a supplier, and other business expenses.

It also shows bankers that the company is a good credit risk. 

In addition to cash on hand, money moves in and out of the business. This is known as cash flow. Think of it as the tide. The money comes in as receivables and it goes out as payables. You don’t want a tidal wave of payables or a drought of receivables, just a gentle back and forth motion.

The key to cash flow is to keep track of receivables so that customers pay on time, replenishing the checking account in time to pay the company’s debts. In keeping with the company’s overall strategy to systemize every key process, cash flow can be measured, analyzed, and planned. Cash comes from three sources; sales, accounts receivable and miscellaneous non-operating.

The #1 reason for business failure is running out of cash; neglecting to develop cash reports.

Two essential cash reports are: the Cash flow Statement, which shows the actual cash flow of the company for previous months or weeks, and; a Cash Plan, which is a forecast of cash flow in the future including planned receipts and payouts expected in coming months or weeks. A Cash Plan consists of four elements:

  1. The amount of cash you have on hand and in bank accounts - Beginning Cash.
  2. The amount of cash you expect to receive for the next period - Receivables.
  3. The amount of cash you actually pay out.
  4. Forecast the cash balance for the end of the period by calculating the difference between total available cash and total distributions.

To get a good handle on this process requires practice. Remember, the longer it takes to collect on a project the greater the cash draw on your company. Some concerns to look out for are:

  • What is the cost of waiting 90 days for payment?
  • How much interest does the company pay on credit agreements with suppliers?
  • Can you afford a 90-day agreement with your best customers?
  • Should you charge interest or impose a late fee after 30 days?

Don't leave your cash flow plan to chance, contact Holt Marketing and Management with any questions, we are happy to help!


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