Cash flow planning is one of management’s most important, ongoing duties. In a simple comparison, Cash Flow is like checking your bank statement for money going in and money going out every month.
The budgeting of incoming and outgoing cash results in the following benefits:
- It gives management an early warning of future difficulties with cash availability.
- It shows management when a surplus of funds will be available for things other than operating use.
- It provides a plan for payments to creditors that are balanced with receipts.
- It indicates the need to step up collections activity if accounts receivable payments are lagging.
- It demonstrates to lenders that management is informed as to the financial requirements and has planned to meet the company’s obligations.
The basic philosophy of a cash flow system is that things don’t just happen in a business, they can be influenced and controlled. If a business embraces this philosophy, then a system of planning when bills can be collected and paid can be devised and utilized to take guesswork, or perceived Providence, out of the equation.
In other words, checks don’t just show up in the mail, and a company doesn’t just happen not to be able to meet payroll this week. Conditions can be somewhat foreseen, and planned responses can be had. Of course, cash flow projection/management must be used in conjunction with a proper collection policy and procedure.
The theory behind a cash management system is that the due dates of Accounts Receivables and Accounts Payable can be listed and planned-out in advance, the payment history of customers can be tracked and planned in advance, and due to this tracking, the company can prognosticate with a reasonable degree of certainty when it will have money coming in.
Therefore, it can determine ahead of actually doing it when it can pay bills, when it can buy equipment or inventory or computers or anything. It will thus not write checks without knowing ahead of time that the cash flow will support all expenditures when they are made, and, in extreme circumstances, if the cash flow will not support expenditures in the future. It will be able to see that well ahead of time, and then take the corrective action of concentrating on sales before the company gets to that bridge.
At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information: