Managing cash flow is critical to keeping your doors open. Much like the blood that courses through your body, cash flows through every area of your organization, nurturing its growth and preventing problems.
To keep your business healthy — and to get sufficient early warning when it’s not — here are some suggestions for monitoring its cash flow.
Project the Cash Receipts Due
The conventional monitoring of receivables tells you how much cash is due to you, and “aging” those receivables helps you make an educated guess about when some of it will come in. But you can manage your incoming cash better than that.
Look back at the remittance habits of your sources of cash and calculate when each one is likely to send the next payment. This allows you to build a cash flow forecast that helps you better manage your company in four different ways:
- It lets you more accurately anticipate payments before they arrive.
- It lets you plan in more detail how you’ll use each payment when it comes.
- It lets you recognize sooner when a payment is late, so you can begin taking steps immediately to bring in that revenue.
- It helps you recognize weekly, monthly, and seasonal cash flow patterns, so you can take advantage of increases and compensate for shortfalls before they harm your business.
Anticipate Your Cash Requirements
Tracking your payables — including payroll, fixed costs, and other anticipated spending — specifies your overall bill-paying obligations. But tracking and managing the date that you must make each of these payments will give you very definite targets for accumulating specific amounts of cash. These targets are helpful to small-business owners because:
- They help you recognize the same kind of weekly, monthly, and seasonal cash patterns you may see in your receivables.
- They let you recognize sooner when you’re falling short, so you’ll have more time to find sensible ways to compensate.
- They let you make use of extra cash on hand and prepare for larger than normal payment obligations.
Calculate Cash Balances in Advance
It’s useful to know your current bank balance. It’s just as important to know whether your balance on specific dates in the future will be large enough to:
- Cover your rent or mortgage next month;
- Meet your payroll when it next comes due; and
- Pay your suppliers and your other bills.
You can make these projections easily and accurately when your accounting system tracks the dates and amounts of expected receivables and payables, as discussed above. Combining expected cash inflows and outflows draws a picture of your business’s current and future cash positions, providing advance notification of good and bad times.
Compare Cash Performance to Cash Plans
Cash on hand is not the same as revenue or profit or even liquidity.
- Revenue is the income generated from your business’s sale of goods or services.
- Profit tracks the surplus of business revenue remaining after you have made all required business expenditures, usually during a particular accounting period.
- Liquidity is the total amount of money your business can assemble on very short notice by converting every possible asset to cash, almost as if your life depended on it. If it would take more than a few days to convert an asset — like land, buildings, machinery, and vehicles — to cash, it doesn’t count toward your business’s liquidity.
None of those has much to do with cash on hand, which is the amount in your checking and savings accounts, customer payments received but not yet deposited, and marketable securities.
It’s helpful to track and compare your current cash on hand against last year’s cash performance and this year’s cash plan. These comparisons provide additional benchmarks you can use to evaluate how well your company is performing and to pick up early warnings of cash flow extremes.