In Moving Your Business Forward: Part One we talked about how important it is to be proactive rather than reactive and how profits does not always mean positive cash flow. By monitoring the inflow of cash from, sales, accounts receivable and the sales of any capital assets against your operating expenses you will reveal any short fall ahead of time. In either starting or growing your business a projected Cash flow Budget helps you determine the peaks and valleys that will affect your cash and ability to met your financial obligations. You will need to make projections for future cash receipts and cash disbursements. Note.. I did not say future sales and expenses. It is all about when the cash is received and paid out. A Cash Flow budget will help you prepare in advance and determine how you will obtain the cash you will need and when you will need it.
You may ask “if my company is making a profit and sales are on the increase why do I not have that money in my bank account”?
If cash flow is much lower than profit, your company ended the period with larger amount in accounts receivable and more inventory than at the beginning of the period. More customers that are granted terms will result in an increase in the amount of money owing to your company. To supply the additional sales to customers you may have to increase the amount of inventory you carry.
If cash flow is much higher than profit, your company ended the period with fewer accounts receivable and less inventory than at the beginning of the period.
Here are suggestions for helping your operating cash stay flowing.
- Get paid before you deliver – Deposits
- Deliver what you sell- Delivery dates
- Invoice what you deliver – Timely
- Collect what you invoice – Enforce your credit policy -A/R
- Deposit what you collect – Immediately
- Tighten your inventory – just in time inventory management
- Consider Leasing instead of buying
- Offer discounts on early payments
- Pay bills only on the due date
- Enforce your credit policy
Dianne Mueller CPB, SACC
Soma Small Business Solutions
www.simplysoma.com
