Note: This article is the first in a two-part series on achieving better cash flows for your business or nonprofit organization/association. Next month’s article will cover specific strategies to improve your cash flows.
According to a CBInsights study, running out of cash is the second highest reason why startups fail. To prevent this from happening to your new business/organization, it’s important to manage your cash flow efficiently. So let’s first cover some basics about cash flow.
What Is Cash Flow?
Cash flow is the money you have available at any given point in time. This balance represents the money flowing in and out from your day-to-day operations. Inflows of cash can come from customer/client/member fees received, point-of-sales receipts, and program income. Outflows include vendor payments, rent or mortgage payments, payroll as well as owner distributions and tax payments.
How Is Cash Flow Different than Profitability?
Many business owners fail to distinguish between cash flow and profitability. While cash flow relates to the actual money coming in and out of your company, profitability relates to the amount of revenues left after deducting all expenses. It’s great if your company is profitable, but you can still have major issues if you don’t have the money available to pay your obligations when they are actually due. This may occur if you hold accounts receivables (A/R) related to those revenues earned. So a practical challenge exists if your A/R collections take too long and bills come due before money is available in the bank.
How Do Cash Flow Problems Occur?
Cash flow problems often are caused by timing issues. Regardless of your company’s overall profitability, your available cash balance can fluctuate greatly based on when your money is actually received and paid out of your bank account. If your services and/or sales revenues are cyclical in nature, it may be difficult to cover your regular monthly bills during the “down” revenue cycles. That’s why the timing of your cash inflows and outflows are important to understand.
On the other hand, your cash flow problems could be a sign of a deeper issue with your company’s profitability. That’s why it’s important to review and understand your financial statements, to see if you need to improve your bottom line by increasing revenues and/or reducing expenses. See my article for an example of how to address your profitability risk.
Understand Your Current Cash Flows
To achieve better cash flow management in the future, you’ve got to understand your current cash flows. For a non-accountant this may be a little daunting, but it’s essentially a simple equation:
Project Your Future Cash Flows
Once you start tracking your cash inflows and outflows, you’ll begin to get a sense of any cyclical trends. This will help you to do the next step, of forecasting your future cash flows. By forecasting, you’ll can anticipate your cash requirements, helping you to see months where you expect deficits (more cash paid out than received) and surpluses (more cash received than paid out).
Cash Forecast Tools
Users of QuickBooks can create a Cash Flow Forecast Report using the Reports feature, and there are apps available that integrate seamlessly with QuickBooks, such as Cash Flow Frog and Plan Guru. Excel also has a cash flow forecast template.
Sound Business Decisions
Cash flow forecasting enables you to make better business decisions. For example, let’s say you’re considering investing in more equipment, moving to a larger space, or expanding your inventory. Since these actions require a cash outlay, you’ll want to consider your cash flow projections before making the investment to be confident you can cover those expenses when they become due.
Once you understand cash flow and how to do cash flow projections, you can chart a course for improving your practice’s cash flow going forward! In next month’s article, I’ll cover what actions you can take.
If you have questions and/or would like to understand more about Improving Your Cash Flow, please reach out to me. I’ll be happy to talk with you. Orin Schepps, Founder and CEO @consultanceaccounting https://www.consultancellc.com.