Cash Flow Forecasting
Cash flow is the grease in the gears of a business. Run out of it and the whole machine seizes up – perhaps never to run again. Obviously, letting your business run out of cash is to be strictly avoided. Less obvious is exactly how.
Cash Flow Forecasting is Key
The key is cash flow forecasting. You predict the flow of cash in and out for your business in an effort to spot – as far in advance as possible – any future cash shortages. This allows you to take evasive action early so the calamity of insolvency is avoided.
How to Forecast Cash Flow
How is cash flow forecasting done? List all the inflows and outflows of cash in your business and determine when these will occur. Record the amount of expected receipts and payments month by month. If you are paid after the sale, look at historical trends to predict how much you might expect to receive 30, 60 and 90 days after a sale. If you buy on credit, indicate the outflow when the payment on the credit is made. Be sure to include tax receipts and payments. Accurate accounting of inventory, both work in process and finished goods, is also critical because it can be one of the biggest consumers of cash in a business.
Evasive Maneuvers
So your forecast illuminates a potential cash crunch? Now what? There are several actions you might take. Deferring expenses by paying on credit, factoring receivables so you can get a portion of the cash from a sale when you extend payment terms and borrowing against inventory can be used to get past a temporary cash shortfall.
By using the powerful tool of cash flow forecasting, you will spot your business’ cash needs and be able to prepare for them.
For a more in-depth treatment of this topic, see Cash Flow Forecasting by David Hardstaff of Sage, United Kingdom. Although the article refers to British Pounds and the Value Added Tax, it is an excellent primer on cash flow forecasting.
To tune up your business’ ability to foresee any cash flow problems, call Zev at PCWare for a no charge consultation.
Zev Sez: The earlier you spot a possible cash crunch, the better your chances of avoiding it.
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