One of the most common reasons businesses go broke is because they lose control over the cash in their business. Even very successful businesses can fall over because of failure to manage their cash. They get ambitious, take on new leases, borrow money, expand and spend significant amounts of ‘cash’ only to find that the revenue, that is the ‘cash inflow’ is insufficient and in a short period they get into trouble. This story is repeated thousands of times each year.
What is a cash flow and what is the cash flow statement for?
The cash flow statement reveals the money coming in versus the money going out. It is the key to survival. It is important to do an annual cash flow projection at the beginning of each year. Whilst this may be a hard task initially, it will become easier over time as you become more familiar with your business.
How Cash Flow Reporting will Help you
A properly completed cash flow analysis will help you:
- Identifying Shortfalls – if you are planning a major marketing campaign that is going to cost you thousands of dollars, you may find there is a significant lag between when you spend the money on the campaign and when you receive revenue as a result of it.
- Identifying Good & Bad months – many businesses are seasonal, be it the ice cream store or the ski resort and this will mean some months are very lean and others are very busy and cash flow needs to be very carefully managed to get through the lean months.
- Determining the impact of capital expenditure – perhaps your plan is to build a new factory to expand your production. Where is the cash coming from to fund this? Will it come out of existing surplus cash flow? Or will you borrow the money which will increase your cash outflow?
- Knowing when it is coming and where from – tracking cash flow helps you to build greater control over your business. Proper analysis will help you where you cash inflows come from which may aid in decision making around marketing efforts. Cash outflow analysis may force you to reassess your business expenses.
- Helps you to be proactive rather than reactive – knowing problems or opportunities in advance will allow you to make better decisions. If you know some lean months are ahead you can prepare by building cash reserves, likewise if you are expecting a spike in sales due to the time of year you can determine how that extra cash can be used.
- Decision-making – Many businesses are project based such as lawyers doing litigation or web designers and you may only get paid in lump sums inconsistently. Understanding your cash flow will help with decision making, such as collecting progress payments and finding ways to manage your cash well.
CASH FLOW REPORTS
Company cash flow reports are broken into three core categories as outlined below:
Operating Activities
- Revenue from the sale of goods or services
- Interest received on loans
- Payments to suppliers for goods or services
- Payments to staff
- Interest payments on debt.
Investing Activities
- Purchase or sale of an asset
- Loans made to suppliers or received from customers
- Payments related to mergers and acquisition
Financing Activities
- Dividends paid
- Sale or repurchase of company stock
- Payment of dividend tax
- Net Borrowings
- Repayment of debt principal
The combined result of these three cash flow reports is the Net Cash Flow.
Projecting Cash Flow
Projecting cash flow involves the projection of not only inflows but also outflows. It begins with your starting cash balance, plus projected inflows, less projected outflows and ends with a finishing cash balance.
If you find that you are having issues with cash flow or want to prevent an issue in the future, focus on four key points:
- Increase the speed of cash flowing in – bring in the revenue faster.
- Decrease the speed of cash flowing out – slow the payment of expenses (note: as a Christian you still have to pay on time, just not early)
- Reduce Expenses – do an assessment of your expenses and cut out expenses that are not necessary
- Increase Sales – boost your revenue through your marketing efforts.