Cash flow analysis, forecasting, and management are essential to operating a successful company. Internal cash flow, or cash flow from operations, is one of the most important financial factors in a business. It is critical for business owners to understand cash flow, and how it differs from net income so that steps can be taken to improve it. This is one of the most important roles of the CFO. Having strong cash flow enables business owners to run their companies efficiently and invest in growth initiatives. An effective CFO helps control the cash flow position of the company, understands the sources and uses of cash, and projects the cash outlook for the company clearly and concisely.
Many businesses report a profit on their income statement but have difficulty making sure they have enough cash on hand to pay all obligations when due. Knowing how much cash the business generates, from what sources, and when it will be generated is extremely crucial. Knowing how much cash the business will need and when it will need it is also very important. Businesses need to be certain that they will have enough cash for payroll, vendor payments, quarterly tax payments, and other essential items.
One of the best ways for business owners to assure their business has the right amount of cash at the right time is to create and maintain an effective rolling 13-week cash forecast. A rolling cash forecast helps the business to anticipate future cash flows and positions. It reduces the risk of surprises and allows the business owner to take action to improve the company’s future cash position.
To manage cash flow, business owners need to understand what affects cash flow and how it can be improved. Following are key items to monitor and manage:
- Accounts receivable – How fast is cash coming in the door? If customers are given too much time pay or payments are not collected fast enough, the business will have an accounts receivable asset but no cash.
- Accounts payable – Cash flow can be improved by negotiating terms with vendors that allow the business adequate time to pay without additional fees. The main objective is to keep the cash coming in faster than it goes out. If a vendor provides 30-day terms, the business should pay in 30 days and not earlier.
- Inventory management – Cash invested in inventory reduces the amount of cash on hand. The CFO will help the business determine an optimal inventory level so that demand can be met without keeping too much cash invested in held inventory.
- Costs – Costs may be reduced or restructured to affect when and how expenses are paid.
- Bank line of credit – Many businesses find it advantageous to have a line of credit available to utilize during slow sales times, or when unexpected costs occur. A line of credit can also be used for growth initiatives.
Business owners can sleep better at night knowing that their business has a plan in place to have the right amount of cash at the right time to handle its expenses. The best way to gain this peace of mind is to develop and maintain an effective rolling 13-week cash forecast and to take action based on the results to manage and control the company’s cash position.