Cash Flow Reality and Misconceptions

Is your company experiencing financial anxiety? According to a U.S. Bank study, 82 percent of business failures are due to poor cash management. In the current economic environment cash management has become even more critical for the life of small companies. According to various research organizations, the companies that are successfully surviving have been exerting control over their cash flow and costs.

Financial experts consistently agree that financial projections and cash planning are the most important financial planning tools for a business. That said, cash planning is the least intuitive of the financial management tools, and therefore the most challenging. And yet, nobody is more qualified than a business owner to forecast the cash for his/her business. The notion that only a financial expert can produce cash flow projections is erroneous. Think about it, the typical accountant is focused on the balance sheet and profit & loss statement (historical information) because their primary responsibility to their clients is to produce the tax returns at the end of the year. The typical bookkeeper is focused on the basic accounting necessary to keep the accountant happy, and the books in order. Of course there are exceptions to the “typical”, and these individuals should be applauded.

Correcting some common misconceptions about cash and cash flow planning:

“We are profitable.”

Fantastic, but profits are an accounting concept and have no direct relationship to cash flow. Profits are on paper. Cash is what you spend, and payments you have actually received, i.e. it is what you have “in the bank”.

“Our accounts receivable is strong.”

Again fantastic, but receivables have no direct relationship to cash flow since it has no designated timeframe. Receivables (e.g. invoices) is not cash. It is the intent of your customers to pay at some future date. Receivables is not cash until it is in hand.

“We don’t have the time to do a plan.”

The busier your company is, the more your company needs to plan. Financial projections do not have to take hours or days.

“We’re not big enough to need cash flow projections”.

Not true. In reality, it is the smaller businesses who do not have deep pockets that need financial planning the most. These are the companies most at risk when accounts payable gets ahead of cash on hand, or when long-term growth/acquisitions expenses out strip short-term income.

“It is too complex for the average business person to produce.”

Not true. It is a matter of making good and realistic estimates about what you are going to be selling and when, what it will cost and when, and what and when your expenses will be, i.e. money-in and when vs money-out and when. There are tools to help with this process.

“We do the financial projections in our heads.”

Unless your company has just one customer, and only a handful of expenses and cost-of-goods categories, it is unrealistic to believe that a business person can juggle all the variables in his head.

“We do our cash flow projections once a year when we do our budget.”

The thought process behind this statement defies logic. Do you only check your bank account once a year? Ideally, a cash flow projection should be done every time A/P is processed (e.g. checks cut), or at the very least once a month.

“We look at our income statements and balance sheet every month.”

Neither the income statement nor the balance sheet is sufficient to plan and manage cash. These reports are historic, they are not future facing.

“Our books are accrual-based, so we don’t need cash flow projections.”

Not true. Accrual-based or cash-based accounting is about how your company handles sales and expenses, primarily for tax purposes. Your accounting method has no bearing on cash projections which deal with the future timing of cash-in and cash-out for your company.

“We’re OK since we regularly produce a Cash Flow Statement.”

Not true. Do not confuse a Cash Flow Statement with a Cash Flow Projection. The Cash Flow Statement shows how cash has flowed in and out of your business in the past. The Cash Flow Projection shows the cash situation over a period of time in the future.

“Our invoices are due upon receipt, so we don’t need financial projections.”

Not true. Keep in mind, growth/acquisitions (e.g. expanding business hours, new product lines or service, new staff, etc.) or changes in vendor payments (e.g. acceleration of payment schedule, increase in cost, etc.) and expenses (e.g. rate increases, additional services, etc.) could have a dramatic impact on your cash flow.

There are several ways to do a cash flow projection. If you talk to financial experts they each may have their preferred method and terminology. However, you do not have to defer to a financial specialist to get your financial projects done in a rather painless manner. ezTRUNNION LLC has developed a cash flow projection and cash management tool that is integrated with QuickBooks(R), the most popular accounting package for small businesses. CASH Cop(TM) has enough flexibility built into the tool to allow companies to create cash flow projections that suite their situation and needs. Because the tool focuses only on cash flow projections and cash management the price point is affordable for small businesses.

There are other products available that also do cash flow projections. Free Excel(R) templates are available from a variety of resources, including SCORE. These templates require the user to manually enter all information, and manually keep them up to date. Because of the time required to acquire the necessary information and then key it in, users typically become discouraged about producing cash flow projections on a regular basis.

There are also financial planning tools, available for a price, that have a host of reports, graphs, and tools integrated into one application. These types of tools fall into one of two categories: stand-alone or integrated. The stand-alone financial planning tools still require the collection and keying-in of essential data, but these tools are affordable to a small business, and product a variety of reports and graphs. These tools vary in their “friendliness” to layman users. Check them out before buying. The integrated financial planning tools can pull necessary information from specified accounting systems (very few integrate with QuickBooks), but these tools tend to be more expensive, providing reports, graphs and other financial tools geared to larger businesses. Be sure you understand the pricing (e.g. monthly service charge or one-time purchase) before buying.

In summary, there is no substitute for cash projections. Any small business can take control of their financial future by utilizing this essential financial planning tool. There are a variety of products on the market that will enable a business to create their own financial projections without necessarily engaging a financial specialist. A business need only determine their cost constraints (price of the product) and time requirements (time required to learn and use the product) for a cfinancial projection tool, and then acquire the tool that suites their needs. Commitment to regularly producing and reviewing cash flow projections is essential to the financial success and survival of every business.

This entry was posted in Uncategorized and tagged , , , . Bookmark the permalink.